Buying a business in New Zealand can be both exciting and stressful. It marks the start of a new adventure, but usually involves some uncertainty and risk.
START A NEW BUSINESS INSTEAD?
An existing business should offer an established customer base and cashflow. However, you also inherit existing challenges and may need to make changes to align the business with your vision. Starting a new business allows you to develop everything to your specifications but requires new customers and establishing a market presence from the ground up.
ENGAGING PROFESSIONAL ADVISORS
If you decide to buy a business, it is critical to get professional help and get it as early in the process as you can. Your lawyer and accountant can provide valuable input and advice to help you make an informed and de-risked decision. These advisors assist you to ensure that all necessary considerations and issues are identified and addressed.
THE AGREEMENT
One of the first steps in buying a business is finalising the agreement. For small to medium sized business, we advise using the standard Legal Agreement for Sale and Purchase of a Business, compiled by what is now known as The Law Association (formerly the Auckland District Law Society). This agreement has terms and conditions well understood and accepted in the market and covers most matters that usually need to be considered. Key elements to consider include:
- Names of the vendor and purchaser
- Description of what is being sold
- Price and terms of payment
- Warranties by the vendor
- Conditions such as obtaining suitable finance and due diligence
- Possible restraints of trade
- Issues related to existing employee contracts
Make sure your lawyer reviews the agreement before signing to ensure all critical elements are covered and to identify any potential issues.
WHO OR WHAT SHOULD BUY?
Choosing the right purchasing entity is essential. That choice is likely driven by such matters as limited liability protection, tax considerations, and succession planning. Common options include sole proprietorship, partnership (including limited partnership), limited liability company, and trading trust. Including “and/or nominee” in the purchaser’s name in the agreement allows for flexibility while you discuss the most appropriate entity with your lawyer and accountant.
DUE DILIGENCE
The importance of a thorough due diligence process cannot be overstated. This means a detailed analysis of the business to ensure you are making a sound investment. Key aspects may include:
- Reviewing the business’s leasing and licensing arrangements
- Examining customer and supplier relationships and contracts
- Considering staffing levels and contracts, and interviewing key staff
- Reviewing stock valuations
- Validating asset ownership including checking for any lending securities that may be in place to secure loans made to the business
- Understanding any intellectual property rights being bought
- Analysing financial statements from the past several years
While most due diligence typically occurs after signing the agreement, much of this work can be done beforehand to inform your offer.
BEWARE UNDERESTIMATING TIME
Both buyer and seller usually aim to complete the deal quickly, but delays can occur due to involvement from other parties protecting their own interests. For instance, if the business is in a leased property, landlord consent is required for lease transfer, which can take time. Plan for a few weeks of due diligence and finance arrangement, followed by additional time for landlord consent and other approvals.
MORE ON THE SALE AND PURCHASE AGREEMENT
As we have said, although many business sale and purchase transactions use the standard The Law Association Agreement, and this covers most things, some situations may require additional terms. Examples include:
- Particular employee-related issues
- Vendor finance
- Purchase price “earn outs”
- Additional vendor warranties about the business
- Handling work in progress at settlement
If the purchasing entity is a company with multiple shareholders, a Shareholders’ Agreement is vital. This records the rights and obligations of each shareholder, covering matters such as:
- Incapacity of a shareholder
- How shares will be sold including pre-emptive rights to other shareholders
- How shares are to be valued in the event of a sale
- Any restraints of trade on a selling shareholder
- Dispute resolution processes
A Shareholders’ Agreement may prevent future conflicts and expenses by providing clear guidelines for common eventualities.
RELATIONSHIP PROPERTY
Finally, buying a business in New Zealand could have implications under the Property (Relationships) Act, as the asset may be, or become, relationship property. This means its value could be subject to equal division between partners upon separation, affecting ownership and financial arrangements. Legal advice is crucial to navigate these implications.
CONCLUSION
Buying a business in New Zealand requires careful planning and consideration. Consulting with your lawyer and accountant early in the process ensures a smooth transaction and awareness of potential issues. While professional advice comes at a cost, it is often far less than the cost of encountering problems later. By following these steps and seeking professional guidance, you can navigate the complexities of buying a business and increase your chances of enjoying a successful and rewarding venture.