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Newsletter
PURCHASING A BUSINESS?Many New Zealanders are attracted by the prospect of "being their own boss". This lifestyle choice often sees would-be entrepreneurs purchasing what they believe to be a successful business, only to become a statistic of business failure. Investigating a business thoroughly from the outset can help reduce the chance that the business will fail. This investigation process is commonly known as due diligence. Ideally, the due diligence process will be initiated before any agreement to purchase the business is entered into.
Practical Due Diligence Steps
Before embarking on a formal due diligence programme, the potential purchaser should ascertain whether or not the proposed business is one which needs to be purchased at all. It may be that time and energy are better spent on developing a new business from scratch rather than purchasing the goodwill of an existing operation.
Prospective purchasers should also consider whether the target business is compatible with their managerial skills and with their business or lifestyle objectives.
Actual Due Diligence
Once it is established that the business is one which should be purchased and that it is compatible with the desired outcomes of the purchaser, the purchaser should proceed to gather information relating to the business. Obviously, the type of information crucial to each business will vary but will include amongst other matters:
- Financial analysis;
- Stock availability, composition and turnover;
- Key employees;
- Bad debts;
- Market research;
- Taxation;
- Resource consents;
- Restraints of trade;
- Fixed assets;
- Computer systems;
- Leases;
- Business structures used to purchase the business;
- Price.
Usually a proposed purchaser will seek the assistance of professional advisors in relation to the matters listed above. Not only will thorough investigation at this early stage help ascertain the purchase price, it will also assist in minimising unforeseen events once the business has been purchased. To this extent, the due diligence process may be seen as an exercise in risk reduction. It may reveal matters which are able to be dealt with prior to the purchaser committing to the purchase or may convince the purchaser that proceeding with the purchase is unwise. In any event, the more information which is gathered about the business, the better placed the purchaser is to assess the risk of purchasing the business.
The extent of the due diligence process varies according to the complexity of the business but is usually determined by a cost/benefit analysis. It should also be remembered that money invested at this early stage of the process may be significantly less than the cost of remedial assistance after settlement.
Regardless of the emphasis placed on the due diligence process, there is, as with any business venture, an element of risk involved in acquiring a new business. Professional advice at the early stage of a transaction can help minimise, but not eliminate, risk. If you are considering purchasing your own business, it is essential to seek professional advice at an early stage to devise a due diligence programme to suit the target business.
