When you are considering buying a business, it is important to understand what makes it tick.
If it's a café, is it location, the food, the coffee? What are the fundamentals? What is it doing that makes the profit?
The Christchurch events show that businesses that understand these can take steps to minimise the impact of earthquakes and other disasters. The obvious example is having regular and frequent data backups. Even something as simple as backing up your own financial data will give you access to information you need for insurance claims.
Recognising the importance of a piece of equipment means you can take steps to protect it. Christchurch lines company Orion is a perfect example. Before the earthquakes it undertook risk analysis of its assets and recognised the transformers were vulnerable to earthquakes, so it took simple steps to ensure they were fixed in place to minimise any likely damage.
If buying a business that has existing premises is the location important? If so, it is important to do due diligence on the building. Quite apart from the usual checks (resource management, food licensing etc) check how the building will respond in an emergency. Detailed engineering reports will highlight risks - as well as structural and maintenance factors, consider fire egress.
Your purchase contract should include conditions to cover building due diligence. Most landlords will by now have a detailed engineering report on their building. Make sure you can review and understand it before committing yourself.
Key drivers and risk management
What are the one or two key requirements for the business to make the income you think it can? Is it a secret recipe or a key employee? The important thing is to assess these and take steps to minimise the risk.
The question most Christchurch businesses faced after the earthquakes was "what is plan B"? Some had been wise enough to think about plan B before plan A was shaken apart. If you are buying a business, what can you do to have a plan B? The answers will include:
• Insurance to cover assets such as plant and machinery
• Business interruption insurance - but make sure you understand what it will pay, how it is calculated and when the payment will be made. Many Christchurch business owners had bad experiences with this, as my colleague Michael McKay outlines in another article.
• Insuring other risks, for example insuring a key employee against accident, illness or death.
• Documenting procedures, especially those that may be used only in an emergency, and ensuring everyone has access to them. Our own business has a well-documented staff contact list and telephone tree. It is held on our computer system and most staff have remote access. But because servers might be affected, all staff also have a paper copy at home.
• Planning to operate from other premises. Connecting staff from their homes can work well.
• Finding other ways of delivering your product or service, such as internet sales.
• Protecting your IT through regular data and system backups, off-site data storage and servers, remote access and cloud computing. Our staff could access the work computers from home and we can transact all banking off site, so we were operating again within a day of the February earthquake.
The Christchurch earthquakes have shown us that business is the lifeblood of a city. When a disaster happens getting your business back up and running is hugely important.
Assessing, understanding and minimising risks before you buy into any business is crucial to ensuring continuity.
Simon Price is a partner in Malley & Co lawyers and a specialist in business acquisitions, restructuring and leasing.