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Buying a business or franchise

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:

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

If you’ve found a business you like the look of:

  1. Research the business, including its market and industry, its suppliers and competitors.
  2. If you wish to proceed, formerly 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. Professional advice is vital, but getting a lawyer or accountant on board also enhances your credibility as a buyer.
  4. Ask the owner why they’re selling. Compare it to the financial picture painted in the sales documents, eg the information memorandum.
To get detailed information about a business that’s for sale, potential buyers must sign a confidentiality agreement.

To get detailed information about a business that’s for sale, potential buyers must sign a confidentiality agreement.

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:

  • pending court cases or other legal disputes, eg over intellectual property
  • the business owns all key assets, eg property, equipment, vehicles and intellectual property, and can therefore 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

Get your accountant to go over the books for:

  • areas for improvement
  • trends, eg in debt, revenue and stock, 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, eg media reports, to see where the business sits in its industry.

Balance sheet

This is another job for your accountant. They should look at:

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

A business can be broken down into two parts — goodwill and assets.

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. If the business has been neglected, expect to pay mostly for its assets.

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.

Checklist of common business assets

The contract

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:

  • restraints of trade, eg to stop the owner setting up a new business in the same market
  • whether staff will be kept on
  • a buffer period to conduct financial due diligence.
You can offer to have a gradual handover where you pay off the sale price from your profits.

You can offer to have a gradual handover where you pay off the sale price from your profits.

Some owners prefer this because it gives them peace of mind they’re selling to people who’ll make a success of the business.

Company details

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.

Taxes you might have to pay

GST

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

Income tax

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.

Staff

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:

  • 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.

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

If you want to buy a franchise, speak to current franchise holders about their experiences with that brand.

If you want to buy a franchise, speak to current franchise holders about their experiences with that brand.

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.

Buying a franchise — like buying a business — has advantages over starting from scratch, including:

  • proven strategies and processes
  • established brand
  • skipping the risky start-up phase
  • support and advice from the franchisor to get you started.

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
Be wary of franchisors that demand large upfront fees or try to pressure you to sign.

Be wary of franchisors that demand large upfront fees or try to pressure you to sign.

Tips on buying a franchise

Franchisors who are members of the Franchise Association of New Zealand (FANZ) sign up to a code of practice to:

  • provide a disclosure document with important information
  • offer a seven-day cooling off period after the contract has been signed, or include mediation services.

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 should also:

  • Check what ongoing costs you’ll be locked into, eg for advertising and stock.
  • Ask for a disclosure document outlining the company’s history and track record. Even if it’s not a FANZ member, a credible company should have one.

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