General

Buying a business or franchise Te hoko pakihi, whakamana peka rānei

Buying a business or franchise at the right price can have big advantages over starting from scratch. Here’s a guide to help you decide if this is the right choice for you.

Before you buy

It might make financial sense for you to buy an existing business. The main reason is that you skip the precarious start-up phase when so many businesses close.

You also get:

  • customers
  • premises
  • a brand
  • experienced staff
  • suppliers
  • long-term contracts
  • a business plan
  • good financial record or rating.

Follow these steps if you’ve found a business you’d like to buy.

  1. Research the business, including its market and industry, its suppliers and competitors.
  2. If you want to buy it, formally register interest in buying the business with the person appointed to manage the sale.
  3. Appoint an adviser to talk to the owner’s representative. This makes you more credible as a buyer.
  4. Ask the owner why they’re selling and compare it to the financial picture painted in the sales documents.
Research your competitors

Due diligence

Due diligence is the process of understanding what assets, liabilities and commercial potential a business has. It’s to make sure what the owner of the business says is true.

Due diligence should check:

  • pending court cases or other legal disputes
  • that the business owns all key assets and can sell them to you
  • all contracts, including agreements covering employment, sales, supply, rent and service levels
  • key staff – who they are, how much they know about operations and if they’re likely to leave after the sale
  • how loyal customers and suppliers are to the current owner, which can affect how much you’ll pay for the business’s goodwill.

Financial history

Ask your accountant to check the books for:

  • areas for improvement
  • trends, to see the effect of seasonal demand or law changes
  • solid grounds for financial forecasts you’ve been given.

Compare the books with independent information to see where the business sits in its industry.

Balance sheet

Ask your accountant to look at:

  • stock levels – if the business has lots of stock, ask why
  • debts and how well the business chases money it’s owed.

Making an offer

A business can be broken down into two parts.

Goodwill

Goodwill is the health of the business – if it has a strong customer base, great reputation and high turnover, expect to pay more for it; otherwise, expect to pay mostly for its assets.

Assets

Get a professional to assess these; if the owner raises the price, check if this relates to the business’ goodwill.

The contract

Ask your lawyer to draw up the contract for you. 

A contract should include:

  • details of the sale price and payment
  • restraints of trade – for example, to stop the owner setting up a new business in the same market
  • if staff will be kept on
  • a buffer period to conduct financial due diligence.
Introduction to business assets

After you buy

If the business you’re buying is a company, it will be registered with the Companies Office, which holds all details of companies on public record. Once you’ve bought a company, the seller must tell the Companies Office about any director or shareholder changes.

Register with government agencies

You may have to pay:

  • GST
  • income tax.

A sale and purchase agreement should state:

  • if the sale is GST inclusive or exclusive
  • the rate of GST on the sale – this could be 15% or 0%, depending on the circumstances of the sale and purchase.

The way the sale and purchase agreement is written can affect income tax. Talk to an accountant or tax adviser.

When you buy a business with staff, the sale and purchase agreement should say if you’ll take over their employment.

If it’s not part of the sale, you can:

  • negotiate new employment agreements with the existing staff, or
  • look for new staff. 

If you don’t need the existing staff, the seller must handle any redundancies before you take over. This process will depend on:

  • employment agreements the current employer has in place
  • the size of the business – those with 19 or fewer employees might not need to meet certain restructuring requirements
  • whether employees are classed as vulnerable workers. 

Special conditions apply to employees in the following industries:

  • cleaning and food catering services
  • laundry services in education, health or age-related residential care sectors
  • orderly services in health or age-related residential care sectors
  • caretaking services in the education sector
  • services in the security sector.

Learn about staff redundancy

Find out about employee protection provisions - Employment Agreement Builder

 

Buying a franchise

A franchise is a branch of an existing business brand.

The company that owns the brand sells licences, on strict conditions, to use its brand for commercial purposes.

Examples of franchises include:

  • restaurants, cafes and takeaways
  • retail stores
  • car dealerships
  • real estate
  • supermarkets
  • cleaning
  • gardening
  • convenience stores
  • dry cleaners.
  • Benefits of buying a franchise include:
  • proven strategies and processes
  • established brand
  • skipping the risky start-up phase
  • support and advice from the franchisor to get you started.

However, franchises have limits on your choices and influence over branding, operations and growth.

What most franchises offer What most franchise buyers must do
Brand rights and signage Use company marketing materials and strategies
Training and advice Meet financial targets and follow set processes and polices
Advertising support Advertise in a certain way
Shop fittings, equipment, supplies and stock Use approved suppliers

Learn more about

Starting a business