Kevin Lampen-Smith: Fishhooks to watch out for when buying your own business

Wednesday, 31 January 2018

Knowing the type of business you want to buy is a big first step.

OPINION: My New Year's resolution is to stop working for the man and become self-employed. I'm quite keen to buy an established gardening business in my area and I've heard from friends that there is one for sale that could be improved and made much more profitable. There's no property involved so I figure it will be simpler than buying a house, but a couple of friends who own their own businesses are telling me that it's not that easy. How do you find a business to buy, and are there any loopholes that I should be aware of?

Lots of people spend their summer holidays plotting to escape their day job, but that often evaporates when the cold, hard reality of real life sets in (or their credit card bill arrives). The fact that you've identified the kind of business you'd like to buy shows that you've done more thinking than most who day dream about working for themselves.

It's a big leap from working to advance someone else's financial and business goals to being the boss, but that doesn't mean it can't be done.

As anyone who has gone into small business will tell you, it's a major life decision. The move from salary or wage-earner to business owner can be a daunting one and it's important to realise that becoming the boss doesn't guarantee you entry to an easy life. Even though the World Bank has described New Zealand as the easiest place in the world to do business, only two-thirds of businesses survive their first two years.

I'm sure you've heard this kind of doom and gloom before and I'm not trying to destroy your dreams. Rather, I think it shows how important it is to seek as much advice as you can before taking such a huge step. It's smart to enlist a team of professionals to help, particularly a specialist business broker and a lawyer.

Kevin Lampen-Smith: 'Specialist business brokers do exactly what their name suggests, which is focus on helping business buyers and sellers get the best out of the deal.'

Specialist business brokers do exactly what their name suggests, which is focus on helping business buyers and sellers get the best out of the deal. A specialist business broker has experience in marketing and selling businesses.

They will have a list of businesses for sale so you don't have to rely on word of mouth or scan the community noticeboards in dairies for 'for sale' signs. Working with someone who has experience and expertise in these kinds of arrangements makes good sense – like most high-cost transactions, buying a business is no time to call in a favour from a mate or rely on a DIY job. We recommend working through a specialist business broker rather than a traditional real estate agent who may do a bit of business broking on the side, as they will be well-versed in the ins and outs of these kinds of deals.

While the business that you're interested in buying doesn't have any property associated with it, buying a business requires a huge amount of due diligence before you sign on the dotted line. This begins with finding out about all the key assets – any equipment, vehicles, physical and intellectual property – and going through a comprehensive financial history that includes projections, financial forecasts, debts owed and current contracts.

A business broker will be able to tell you all about the staff and employees, including what roles they have and the nature of their contracts with the business, and check whether there are any pending court cases or legal disputes against the business. It's a good idea to get a lawyer and an accountant to look over any documents provided by the broker or the business owner, and make sure you fully understand what they show. If there's anything that doesn't make sense to you it is far better to ask questions now rather than fret later.

Like real estate agents, business brokers are paid by the seller. Business brokers must operate in accordance with the Real Estate Agents Act 2008, and uphold the related code of conduct. Using a business broker gives you an added level of protection that's not available to someone who buys a business privately, which greatly reduces the financial risks involved for both buyers and sellers.

It's a big leap from working to advance someone else's financial and business goals to being the boss, but that doesn't mean it can't be done. Do your homework, work through a business broker and enjoy the ride.

Kevin Lampen-Smith is the chief executive of the Real Estate Agents Authority (REAA), the independent government agency that regulates the New Zealand real estate industry. If you have a question about buying or selling property, send it to susan.edmunds@fairfaxmedia.co.nz For independent advice on buying or selling property, check out www.reaa.govt.nz.