“I think I’ve overpaid for this business.”
It’s something I hear more often than you might expect. A business owner will get in touch after buying a business themselves, having discovered that the deal might not have been as good as they first thought.
Usually, they’re looking for advice on how to fix a problem that could have been avoided in the first place.
After nearly 20 years as a business broker in New Zealand, I’ve seen how easily buyers can make expensive mistakes when purchasing a business. One of the best ways to understand these risks is through the story of Steve, a client who discovered that trying to save money during a business purchase can end up costing you much more.
The Story of Steve: A Business Acquisition That Went Wrong
I’d sold Steve a business four or five years earlier. He’d been running it successfully and decided that acquiring another business could be a good way to grow.
I agreed. Buying an existing business can be an excellent growth strategy, allowing you to expand your customer base, increase revenue or add complementary products and services without having to build everything from scratch.
Steve had been searching for the right opportunity for some time when he found what he thought was the perfect business, and didnt understand why it hadnt sold.
It was a private sale, meaning the owner was selling directly to him rather than through a business broker. There’s nothing inherently wrong with buying a business privately. Plenty of good businesses change hands this way.
The problem was how Steve approached the purchase and why a business doesnt sell.
He and the seller wanted to keep things simple and save money. They decided not to involve a business broker, a lawyer or other professional advisers. Instead, they negotiated the deal themselves and used people they knew to help with the process.
When Steve eventually contacted me, he was worried he’d made a serious mistake. As we worked through what had happened, it became clear that he’d made several fundamental errors.
Here are the lessons every prospective business buyer should take from his experience.
1. Use Professional Advisers Who Know What They’re Doing
Steve thought he could save money by using people he knew rather than engaging experienced professionals.
He had access to mates, consultants and other contacts who could offer advice without charging the fees a specialist would charge. It seemed like a sensible way to keep the purchase costs down.
But there’s an old saying that sums up the problem rather well:
If you think it costs a lot to use a professional, wait until you see what it costs to use an amateur.
Buying a business is a significant financial commitment. You might be investing years of savings, borrowing money or putting your existing business at risk to fund the acquisition.
It’s not the time to cut corners on advice.
You need people who understand business acquisitions, know what can go wrong and have the experience to help protect your interests.
Depending on the transaction, that will generally include:
A business broker: Someone who understands the business sale process, market values, negotiations and how a deal can be structured.
An accountant: Someone who can examine the financial information, verify earnings and identify financial risks.
A lawyer: Someone experienced in business acquisitions who can prepare or review the sale and purchase agreement and advise you on your legal obligations.
You want advisers you trust and feel comfortable working with, but that isn't enough on its own. They also need the relevant expertise.
The right professional advice isn't simply another expense. It can be an investment in avoiding a much bigger mistake.
2. Don't Rely on a Homemade Sale and Purchase Agreement
Steve and the seller decided to put their own contract together.
They gathered bits and pieces from old agreements and contracts, then cobbled them together into something they thought would work.
Perhaps it would have been fine if everything had gone exactly as expected. But that’s not the purpose of a properly drafted sale and purchase agreement.
A good agreement needs to deal with what happens when things don't go to plan.
For example, what happens if the financial information turns out to be incorrect? What if the buyer discovers an unexpected liability? What exactly is included in the purchase price? What conditions must be satisfied before the sale becomes unconditional? What happens if one party fails to meet their obligations?
These are the sorts of issues that need careful consideration before you sign.
A lawyer experienced in business acquisitions can help ensure the agreement reflects the deal you've negotiated, identifies the relevant risks and protects your interests while allowing the transaction to proceed.
Steve eventually came to me for help. I referred him to a lawyer who worked through the legal predicament he had created.
By then, however, the problem was already there. Instead of paying for proper advice at the beginning, he ended up spending considerably more in legal fees trying to resolve the situation.
The lesson is simple: get the legal structure right before you sign, not after something goes wrong.
3. Get an Accountant to Examine the Numbers
Steve owned a business and understood how to read financial statements. He assumed that meant he could assess the financial position of the business he wanted to buy.
But understanding accounts and conducting proper financial due diligence are two different things.
When buying a business, you need to look beyond the headline turnover and profit figures. You need to understand how those figures have been calculated, whether the earnings are sustainable and whether there are costs or liabilities that could affect the business after settlement.
Depending on the business, this might include investigating:
Whether reported profits reflect the underlying performance of the business.
Whether the owner's remuneration and other adjustments have been properly accounted for.
Outstanding debts, tax obligations and other liabilities.
Stock levels, equipment, working capital and the condition of assets.
Customer concentration and the reliability of future revenue.
Upcoming costs or capital expenditure that could affect profitability.
The precise checks will depend on the business and the proposed transaction.
Steve didn't get an accountant to investigate these matters properly. As a result, he found himself dealing with problems, costs and issues that he hadn't fully understood when he agreed to buy the business.
Some of these risks might have been identified before the purchase. Others might have been addressed through further negotiation or by structuring the transaction differently, where legally and commercially appropriate.
Instead, Steve had to deal with the consequences after the event.
A good accountant can help you understand exactly what you're buying, what the financial information really tells you and whether the business is worth the money you're being asked to pay.
Don't assume that because you can read a profit and loss statement, you've completed your due diligence.
4. Get a Proper Business Valuation Before Agreeing on the Price
The final mistake Steve made was failing to establish what the business was actually worth.
The seller named a price. Steve considered it and thought it sounded reasonable. He didn't undertake sufficient research, seek a professional market appraisal or establish what similar businesses had sold for.
He simply accepted the seller's figure as a reasonable starting point for the deal.
Unfortunately, he ended up overpaying.
This is one of the biggest risks when buying a business privately. When two people negotiate directly, they might agree on a price that feels fair to both of them. But that doesn't mean it reflects the market value.
The seller naturally wants to achieve the best possible price. The buyer wants to acquire the business at a price that makes financial sense. Neither party necessarily has all the information needed to determine what the market would actually pay.
What is fair market value?
In practical terms, fair market value is an assessment of what a business would sell for in an open market, where the buyer and seller have relevant information and are acting in their own interests.
One useful way to assess that value is to examine comparable business sales.
In New Zealand, we collect business sales data from our business broking company. This allows me to compare a business with relevant transactions and assess the prices buyers have actually paid.
For example, if you're buying an importing business, you would want to look for comparable businesses with similar characteristics, including turnover, profitability and the nature of their operations.
Those sales provide evidence of what the market has supported. From there, the business can be assessed on its own merits, taking account of its strengths, weaknesses and particular risks.
Of course, no two businesses are identical, and comparable sales don't automatically produce a definitive valuation. The quality of the comparison and the circumstances of each transaction matter.
But actual sales evidence is a far better starting point than simply accepting the seller's asking price.
Why private buyers can be at a disadvantage
As a business broker, I can use available sales statistics and my experience of the market to help assess what a business might realistically sell for.
A private buyer may not have access to the same information or know how to interpret it. They might have a good understanding of the industry but still lack the evidence needed to determine whether the asking price is reasonable.
That information gap can be expensive.
The same principle applies to sellers. If you're selling your business, a lack of reliable market information can lead you to accept too little. If you're buying, it can lead you to pay too much.
Before agreeing on a price, establish what the business is worth based on evidence, not just what the seller wants or what feels reasonable.
Can You Buy a Business Privately Without Making These Mistakes?
Absolutely.
Buying a business privately can work well, and you don't necessarily need a broker involved in every transaction. But a private sale doesn't remove the need for proper valuation, due diligence, legal advice and financial analysis.
In fact, when there isn't a broker coordinating the process, it's even more important to make sure you have the right people advising you.
You should also remember that agreeing on a purchase price is only one part of the process. You need to understand the risks, negotiate appropriate terms, arrange funding where required and ensure the transaction can be completed on a sound legal and financial basis.
Saving a few thousand dollars on professional advice may seem attractive when you're already committing a substantial amount of money to a purchase. But if that advice helps you avoid overpaying, uncover a significant liability or negotiate better terms, it could prove extremely valuable.
The Four Rules for Avoiding Overpayment When Buying a Business
Steve's experience illustrates four important lessons for anyone considering buying a business in New Zealand:
Use experienced professionals. Choose an accountant, lawyer and, where appropriate, a business broker who understand business acquisitions.
Get the legal agreement right. Don't cobble together a contract and hope it covers every eventuality.
Conduct proper due diligence. Understand the financial performance, risks, assets and liabilities of the business before committing.
Establish the market value. Use relevant sales evidence and professional advice rather than accepting the seller's asking price at face value.
Steve wanted to grow his existing business by acquiring another one. That was a sensible strategy. His mistake was trying to save money on the very process designed to protect that investment.
When you're buying a business, the goal isn't simply to get the deal across the line. It's to buy the right business, at a price that makes commercial sense, on terms that protect your interests.
Getting professional advice before you sign can help you do exactly that.
If you're considering buying a business, take the time to get the right advice before committing your money. It could be the difference between making a smart acquisition and spending years paying for a mistake.
