Buying a business

Business growth is an important consideration for those who aspire to ‘get off the tools’, but the days of doing deals on a handshake are long gone. This month, we focus on a couple of key points to keep in mind when buying a business

In the May issue of Under Construction, we provided information on how to grow a business, including the risks and rewards associated with acquisition. This time, we outline some of the key things to watch for and provide a general overview of what you need to know before finalising any deal.

Paperwork, paperwork, paperwork

Obviously, for a transaction of such a large size, it is important to work closely with your lawyer and the seller to ensure the business’ sale and purchase agreement is fully documented.

It’s also particularly important to document how any debts and potential issues relevant to the business will be handled. There needs to be a clear agreement in place on how defect periods and potential liabilities for works undertaken by the previous owner/s are handled. If this isn’t done properly then you, as the new business owner, could be left responsible for any outstanding bills. Furthermore, your name could potentially be tarnished by work done under the previous owner/s.

When it comes to the required paperwork, consider this: no one would ever buy a house or enter into a job without a formal contract. So why would you consider buying a business without having the proper paperwork in place?

Known and unknown debts

Any known liabilities in the business’ financial statements are still held by ‘the business’, therefore, these will need to be taken into consideration. These are debts owed by the business, not the owners. For that reason, performing due diligence in conjunction with your accountant is crucial.

They can help you to identify both known and potential liabilities, and will provide a written report detailing their professional opinion of the business and its value. Usually, there will be give and take between both parties on the final selling price, but due diligence reports provide a good starting point for negotiations.

Do the due

Due diligence is all about cutting through the sales pitch and bluster. It provides a degree of certainty about what you’re buying, and what to expect once the transaction is complete. It also supports a closer working relationship between the buyer and seller throughout the negotiation period.

As a result, most owners are more than happy to provide the required information for this process. Be particularly wary of anyone selling a business, who is reluctant to provide information requested for a due diligence report. This should be seen as an immediate ‘red flag’, and an indication that particular business opportunity might be best left alone.

Another point regarding debts is that any shareholder loan accounts (money owed to/from the shareholder by the company) will need to be repaid, unless you come to an agreement with the seller. Usually, the amount will be incorporated into the business’ purchase price.

However, if you are buying a majority share (ie, more than 50% of the business), there may be another agreement in place – such as the previous owners loan account being paid off over time, or that the account remains in place due to their ownership interest in the company. On the other hand, if the business is owed money by shareholders, then this must be repaid either by the shareholder or from proceeds of the sale of the business.

Pitfalls

In our May article, we discussed the potential issues that can occur with an acquisition. Most notably: buying an underperforming business, where turnover was inflated by a one-off transaction and has systems that are incompatible with your own. These issues further reinforce the need to do your homework via the due diligence process, so that a business’ financial and general operations are fully understood.

For example, is a key employee due to retire in the next 12 months? Is a key contract about to lapse and not be renewed? These sorts of situations need to be identified in advance, as they could have a significant impact on the long-term value and performance of a business. Having a thorough understanding of the potential of the business is critical for success.

Don’t forget the staff

Another issue to be aware of is the business’ ‘culture’. While this can often be viewed as a buzzword, the fact remains that if your new employees do not work well with existing staff, then the disruptions that could cause are immense.

While you cannot be sure that these issues won’t arise before buying a business, a considerable amount of time and effort can be spent trying to identify and resolve these sorts of issues if they do.

Taking the time to make sure that all employees are well looked after is arguably just as important as ensuring that you keep the financial performance of the newly acquired business intact.

If you have questions about how to acquire a business, or you would like to discuss any of the points raised in this article, please contact Peter van der Heijden at peter.vdh@crowehorwath.co.nz; or your local Crowe Horwath advisor.

For the contact details of your local office, please visit www.crowehorwath.co.nz/locations or telephone 0800 494 569.