Buying a business or franchise at the right price can have big advantages over starting from scratch — not least, much of the hard work has been done for you. Here’s a guide to weighing up the pros and cons.
There are a number of reasons why it makes economic sense to buy an existing business. You skip the precarious start-up phase when so many businesses close.
You also get:
If you’ve found a business you like the look of:
Confidential information usually includes details about the accounts, customers and suppliers.
Once you’ve registered formal interest, you can start due diligence — the process of understanding what assets, liabilities and commercial potential a business has. It should test the story the owner tells about their business.'
Due diligence should check:
Get your accountant to go over the books for:
Compare the books with independent information, eg media reports, to see where the business sits in its industry.
This is another job for your accountant. They should look at:
A business can be broken down into two parts — goodwill and assets.
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. If the business has been neglected, expect to pay mostly for its assets.
Get a professional valuer to tally the assets. If the owner demands an inflated price for them, check if this relates to the business’s goodwill — walk away if it doesn’t.
Get your lawyer to draw up the contract for you — it must be clear and legally watertight.
In addition to details of the sale price and payment, a contract might also include:
Some owners prefer this because it gives them peace of mind they’re selling to people who’ll make a success of the business.
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.
A sale and purchase agreement should state if the sale is GST inclusive or exclusive. If it doesn’t, raise this with the seller.
The rate of GST on the sale could be 15% or 0%, depending on the circumstances of the sale and purchase, eg whether the seller and buyer are GST registered. This should also be set out in the sale and purchase agreement.
Zero-rated GST: Sale of a going concern (external link) — Inland Revenue
Buying a business will have income tax implications. The way the sale and purchase agreement is written can affect this, so consult an accountant or tax adviser before you buy.
When you buy a business with staff, the sale and purchase agreement should set out whether 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 and the size of the business — those with 19 or fewer employees might be exempt from certain restructuring requirements.
The redundancy process will also depend on whether employees are classed as vulnerable workers. Special conditions apply to employees in the following industries:
Find out more about employee protection provisions (external link) in the Employment Agreement Builder.
Continuity of employment (external link) — Ministry of Business, Innovation and Employment
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:
Buying a franchise — like buying a business — has advantages over starting from scratch, including:
But franchises come with limitations on your choices and influence over branding, operations and growth.
|Most franchises offer:||Most franchise buyers must:|
|Brand rights and signage||Use company marketing materials and strategies|
|Training and advice||Hit financial targets and follow set processes and polices|
|Advertising support||Advertise in a certain way|
|Shop fittings, equipment, supplies and stock||Use approved suppliers|
Franchisors who are members of the Franchise Association of New Zealand (FANZ) sign up to a code of practice to:
Always get a franchise lawyer to look at any agreement before signing. FANZ lists member lawyers (external link) on its website. It also offers free courses and advice to those who buy franchises.
You can also: