Buying or starting a business is a huge investment for most people. Generally speaking most small businesses are not passive investments. Indeed they tend to suck up large amounts of your time and energy, at least in the early stages.

The first step is clearly identifying your reasons for going into business. What is it you are trying to achieve? Clearly identifying your objectives will help you clarify what sort of business you should buy.

For example, you may simply want to work for yourself and have no aspirations to build a business that works without you. If that is the case there are many different types of businesses you could consider, including setting up a business doing what you currently do for an employer. You will be essentially self employed and are likely to only ever have a couple of people working for you.

If you are self employed then it is unlikely that you will be able to sell valuable goodwill when it is time to retire. That is OK so long as you have invested funds outside of the business over the years and have sufficient passive investment income to retire on. Your business is essentially a cash cow – milk it and when you no longer need it walk away.

This is the type of business that tradesmen or highly skilled professional people often choose (for example medical professionals, graphic designers, lawyers, accountants and engineers etc.) These types of business have low entry cost thresholds so long as you personally have the necessary technical skills.

However, if you want to own a business that will work without you then you need to be more selective about the type of business you go into. Generally speaking, the simpler the business model the easier it is to grow. On the other hand a business that relies on highly skilled professionals, expensive plant or equipment, or large capital investment is harder to grow.

It can sometimes be an advantage to go into a business that you cannot physically do yourself. For example, buying a hair dressing salon if you are not a hair dresser can be a great idea so long as you are prepared to work on the business, and not in it. If a hair dresser buys a hair dressing business they will usually end up cutting and styling hair, rather than focusing on business strategies to make the business run without them.

If you want to own a profitable business that runs without you then you need to focus on building a strong brand and culture as well as systemizing / documenting the operational procedures. You will also have to employ people to perform the work (technicians) and manage the work being performed (managers). Your role in the business will ultimately be mainly entrepreneur, rather than hands on technician or manager.

These steps are necessary to build business goodwill (that is independent of you, the business owner) rather than personal goodwill (which is reliant upon you personally).

Owning a business can be very hard work and requires some special skill sets including: 

• Excellent selling skills (you will be selling the concept to employees, suppliers, financers and investors, as well as your points of different to the end customers)
• Business skills and experience 
• Positive outlook 
• A strong vision of what the business will look like when it is “finished” 
• Clarity about the points of difference your business will offer 
• A pleasant and likeable personality 
• Ability to multi task and manage multiple projects at once 
• Ability to handle set backs without losing enthusiasm 
• Leadership skills 
• Passion and commitment 
• Emotional (and practical?) support from your family

Once you have decided on the type of business you want (self employment or a business that works without you) and the industry, you need to decide whether to start a business or buy a business.

Buying a business can be the easier option as generally you will be buying an existing brand, location, product or service range, employees, customers, and goodwill. If you buy a business you will usually be assured of immediate sales from existing customers.

A start up business has to develop a name and brand; organize premises and production facilities; hire operational staff; start a marketing plan to gain leads; create a selling strategy to convert leads into customers; develop and then deliver the product or service to customers, develop administration systems to invoice the customer, collect money owing, pay suppliers and IRD, record transactions and produce financial reports; and an after sales strategy to resell to the customers it has gained.

Existing businesses can be costly to buy so you will need access to starting capital. But start up businesses take longer to get to break even point so while the initial capital outlay may be lower, you will need more working capital while the business gets established.

All businesses need sufficient starting and working capital. Many businesses struggle to get ahead simply because they are under capitalized. Always have a “Plan B” – what will you do if it does not go exactly as you planned?

All businesses need a business plan. But if you are buying an existing business be careful about changing too much too quickly. Often there are sound reasons why a business runs as it does and those reasons may not be immediately obvious to you as the new business owner. Also, if you have paid significant goodwill for an existing business you are probably better to test and measure the existing business operations before making significant changes.

If you are buying a business doing adequate due diligence is vitally important to ensure you are not paying too much, and you are getting what you think you are getting. Many businesses for sale are “dressed up” to look better than they actually are and unless you are careful could end up costing you a lot of money. Your accountant is the best person to help you with due diligence, although you will also need assistance from other professionals such as a lawyer to review the lease and other business contracts and possibly a valuer.

When buying a business the steps are:

• Find out about the business and determine whether it fits your criteria and objectives
• Get financial data about the business – the last 3 –5 years financial results are a good start (never buy a business without reliable historical results) 
• Get other information such as a copy of the lease and broad make up of the customers, products, staff etc 
• Talk to your bank regarding finance required to purchase 
• Talk to your accountant and other professional advisors, as it is likely that they will see things from a different perspective and point out things you may have overlooked 
• Talk to your lawyer about legal agreements and other legal matters relating to the business
• Make a conditional offer
• Once the conditional offer is accepted, undertake due diligence to check that the information you have been given and that you have based your offer on is reliable 
• Prepare detailed financial forecasts for 12 – 18 months out for the business, including the drawings you will need from the business to support yourself and your family 
• Finalise finance for purchase and working capital requirements 
• The offer either lapses or becomes unconditional, as the case may be 
• Settlement and possession

When buying a business do not buy the shares of any existing company owned by the vendor, as there are many potential problems and contingent liabilities doing that. Instead, you buy the business as a “going concern” which usually comprises fixed assets, stock for resell, consumables and goodwill. You would then set up your own business entity (usually a limited liability company) to purchase the business. Always talk to your accountant about the business structure and finance for the purchase before going ahead as there are many tax planning and risk minimisation matters that need to be considered.

Finally, buying a business is quite a complicated matter. To ensure you get the best outcome you will usually invest significant amounts of time and involve professional advisors to assist you. This will cost you money, but it is false economy trying to save money at this point by limiting the input of your advisors… why pay perhaps hundreds of thousands of dollars buying a business without spending a few thousand in checking it out first?

Becoming a business owner will usually be the best or worst decision you ever made. Approaching the decision process systematically and taking professional advice before hand is usually a great investment, even if you decide not to go ahead.

Please click here to go to our handout “StreetSMART Questions when Buying A Business”.