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DECEMBER 2016

Buying or Selling a Business

Introduction

We often receive executed Agreements for Sale and Purchase of a Business that parties have hurriedly entered into without taking legal advice and without fully understanding the implications of those binding contractual obligations. Thus it seemed prudent for us to discuss with you some “do’s” and “don’ts” in relation to the business sale and purchase process.

Buying a business

It is fundamental to do your due diligence before entering into an Agreement to purchase a business or making your Agreement conditional upon you undertaking due diligence on the business and being satisfied with it in all respects.

A proper due diligence of a proposed business will allow you to find out things like:

  • the business’s financial viability (ascertainable from its past years of financial statements and GST returns – we normally recommend a minimum of three years) so that you know the price you’re being asked to pay is realistic;
  • the unexpired term of the Lease for its business premises (in case you need to ask your Vendor to ask the Landlord to grant further rights of renewal);
  • other terms of the Lease (most Leases are in standard form but some can contain further terms which can be onerous – it is important to note in this regard that the standard Auckland District Law Society Inc. business Sale and Purchase Agreement deems that you have approved the Lease five working days after the date of the Agreement or from receipt of the Lease documentation – whichever is later – so the clock is ticking from the moment you receive the Lease or sign the Agreement!);
  • details of the business’s employees, copies of their employment agreements and employment costs; and
  • an assets list - so that you know what tangible assets you are paying for – don’t just expect everything in the business premises to be handed over at settlement – if its not in writing as something you are purchasing, you will not get it on settlement!

You should have also talked to your bank/ financier about your plans so that they can give you a rough guide of how much they would be willing to fund you to purchase the business and ensuring that the Agreement is conditional upon you receiving satisfactory finance – don’t forget to include legal and accounting fees in your calculations!

Agreements are also usually are entered into with an estimated stock value with a pre-agreed percentage adjustment to be made after settlement – so you will need to have extra funds to pay on settlement before stock value is finalised post-settlement.

The business may also have franchise agreements, consents, approvals, licences or contracts you need to be transferred or obtained, and so your Agreement should be subject to conditions which relate to these matters before you become committed to purchase. You need to be careful when agreeing to take over the Vendor’s equipment lease agreement(s) as some of those are fairly one-sided and oblige you to pay a significant penalty if you try to terminate the lease agreement before its expiry.

Selling your business

Selling may appear to the easier part of a business sale and purchase process but it is also fraught with issues if you do not prepare for it.
First, you need to know exactly how much you expect to “take home” from the sale. You need to factor in the business’s existing debts to be paid to suppliers, unsecured creditors and the bank plus the usual legal and accounting fees as well as Landlord’s legal fees for consenting to the assignment of the Lease to the Purchaser etc.

Your bank/ financier may also have the ability to ask for a repayment amount that is more than just what the business owes – this is particularly where there are guarantees in place (such as where you have guaranteed your family trust’s borrowings) or your home loan repayments are tied to your business’s income.

If your Lease has a shorter unexpired term left over (i.e. anything less than five years as a rough guide), you may want to talk to the Landlord pre-emptively and ask for further rights of renewal to save time as you can be assured your purchaser will probably ask for it anyway. In any event, if the lease is assigned to the purchaser you may well continue to be potentially liable under the lease if the purchaser subsequently makes default.

Quite often there are numerous Personal Property Securities Act financing statements registered against the business assets, including some redundant ones that you should have discharged at an earlier stage – we will do the rest on or before settlement.

Conclusion

We recommend you obtain legal and financial (accounting and/or tax) advice before entering into contractually binding relations. Whilst neither advice is ever likely to be free, that expense could save you a lot more money later specially if you do not think through everything.

Our article is only intended to give you a brief idea on the topic. It is essential that you seek our advice before signing any documentation.