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Minimise the risk

on January 13, 2020 / by Tom Beswick

For many people buying a business is likely to be the riskiest thing they do in their life. There can be great rewards (not all just financial), but also a good deal of stress. Risk can be minimised by getting great advice when you buy the business. It is usually cheaper to pay to not have a problem in the first place, then to have to pay to fix it.
Minimise the risk

Following on from my last article, here are a few more questions I get asked quite often.

I want to buy the business off my boss but can’t afford the whole price. Are there any options?

There are many businesses sold that you’ll never hear about – sometimes this is because they are bought by staff. There are lots of ways to structure a deal like this that help the employee into ownership while the vendor still benefits from owning shares for a few more years as they ease out.

This can be a great option for some vendors as they can earn over a longer period. From a business perspective, there is a benefit to the new owner as the transition is smoother than what normally happens with an abrupt sale to an outside buyer.

One problem this sometimes helps to overcome is the lack of capital. Many “young” people don’t have access to the zeros in their bank account required to buy a business – partly because they haven’t been on the right side of house price inflation.

How do I take over the business name if you are telling me not to buy the company?

What happens is that at settlement the old company changes its name – Tauranga Trades Ltd becomes Ben Smith Ltd. Then you come along and register your new company as Tauranga Trades Ltd.

That way you get to keep all the brand recognition (goodwill) that you have paid for – without taking on the skeletons in the closet (as if you buy the company shares you inherit all the company history).

I am buying a business off someone I know well (friend or family etc) – do I still need to get separate advice?

Yes, yes you do. People often take short cuts when buying from someone they know. Sometimes there can be pressure and assumptions are made that would never happen with an external buyer. Remember that the vendor’s advisors will generally act in the best interest of the person who pays their bill – so they cannot be fully independent.

You need your own advisor who can help you manage your risks and will go into bat for you when you need them to without a conflict of interest from acting for both sides.

Will there be a glut of businesses for sale when baby boomers retire?

A lot of people are saying there will be. However, they have been saying it for a while and I have not noticed it yet.

We do see some clients who hold on too long, and then they sell in a rush when they wake up one day and want to get out. As a buyer though, I still recommend jumping in if you find a good business that you are passionate about and think you can add value to. Good quality businesses will always sell, and I personally don’t think there will be a glut of those.

What there could be, is a lot of unsellable businesses that hit the market. Unfortunately there are a number of businesses out there that are dependent on the owners and fall over once the original owners are no longer involved.

Can I set up my own company?

Yes you can, and it seems easy to do online. However, it is not unusual for us to spend longer fixing things from companies that we didn’t setup than the “savings” someone thinks they are getting.

A few things to consider at the company set-up stage include who the directors should be, the number of shares in the company and who gets them.

There are more things to consider then ticking the boxes online with the Companies Office would indicate.

As an example, considering what personal assets you have and how you are protecting them from the risks you have as a business owner is not something people handle well on their own.

Generally, it’s best to get a professional to do it – it’s cheaper in the long run than having to pay someone to fix mistakes.

Asking great questions can save a lot of grief.

I suggest finding advisors who can help a business buyer ask all the right questions from the beginning.