Uncertain career prospects? Financial pressure? Buying a business could be a good option (Part one: the finer points of buying and selling businesses)

Reasons to buy an existing business

Thinking of going into business? The first question to consider is whether to buy an existing business or build your own from scratch.

Establishing a company from scratch and building a sustainable business until it becomes profitable requires substantial investment in time and money, and involves many uncertainties. Buying an existing business also costs money, but if you choose well, the risks can be almost negligible. This makes it easier to obtain start-up funding, such as a business loan. Often, you can also generate returns simply by following the previous owner's operating methods, something that is difficult for a start-up to achieve.

The benefits of buying a business include the following:

1. The seller must provide all business information truthfully. These records and figures will demonstrate whether the business is viable, greatly reducing operating risks.
2. An existing business comes with employees who are usually well trained and experienced, saving you the time and money involved in recruiting and training staff.
3. An existing business already has customers or clients, and its earnings may even be growing while you are buying it. A new business, by contrast, needs substantial preliminary publicity, promotion and sales work before it can secure its first sale.
4. If you want to expand an existing business rather than start one, buying a business that complements or matches your current enterprise and can generate an immediate profit is considerably easier than launching a new division or subsidiary.
5. An established business can generate revenue and profit from the day you complete the purchase.

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Choose a quality business carefully

All these advantages rest on one condition: you are buying a well-run, established business. If you inadvertently buy a poor-quality asset, none of them applies. When deciding to buy a business, you therefore need to consider some important questions:

1. What is the actual value of the business you plan to buy? Your accountant, lawyer and bank will offer their assessments. You can also visit bizworth.co.nz and other business valuation websites for an independent online valuation.
2. Are current business prices sustainable? There is no doubt that once government wage subsidies and rent relief policies end, more struggling businesses will be forced onto the market. Does this mean valuations across the market will face downward pressure?

Will business prices fall in an economic downturn?

At present, the following market trends can allay concerns about falling valuations:

• Large numbers of New Zealanders returning from overseas, along with people made redundant by local businesses, cannot recover their losses through the currently depressed job market and are urgently seeking new income sources. Going into business appears to be the only viable option for these groups at this stage. Given current global and domestic conditions, this strong demand will remain at least over the short to medium term.
• The pandemic's impact has forced many business owners to withdraw after suffering losses they could not afford. At the same time, new buyers have brought fresh capital, lifting activity in the business sales market to a new level. Repeated record sales of European car brands and record-breaking house prices in recent months both support this.
• Current low interest rates make the prospective investment returns from buying a business at 3–5 times maintainable earnings more attractive.
• Last month, the Treasury announced changes to the Business Finance Guarantee Scheme, launched in March. As well as raising the lending cap from NZ$500,000 to NZ$5,000,000 and extending loan terms from 3 to 5 years, it relaxed eligibility criteria and restrictions on how loans could be used. Businesses affected by the pandemic can refinance 20% of their existing borrowings at the BFGS's preferential interest rates, without providing additional security.
• Business valuations are supported by financial statements and other concrete data, rather than determined by market sentiment. A potentially higher proportion of poorly performing businesses coming onto the market will not affect genuinely high-quality businesses. Quality businesses can remain profitable even during economic uncertainty and have the systems and capabilities to sustain that profitability.
• Unlike the property market, the business sales market is less affected by factors common to the wider economy. Each industry has its own distinct characteristics and value drivers. For example, the pandemic may bring many struggling car rental businesses onto the market, but this is clearly unlikely to affect the valuations of food manufacturers.

Business sectors worth investing in

After successive lockdowns, and considering the global pandemic and an unpredictable future, which sectors offer better financial prospects for a new business? The following are all worthwhile options:

• Healthcare
• Social media
• Remote working
• Online gaming
• Online education
• Home DIY
• Cleaning services
• E-commerce
• Groceries
• Delivery services
• Pet adoption
• 5G and bandwidth