Buying a business in New Zealand can be an exciting opportunity to take on an established enterprise, but it also requires careful planning to manage potential risks. For a smoother transition, it’s essential to weigh the benefits, understand the process, and engage professional advisors.

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Should You Start a New Business Instead?

Before diving into buying an existing business, consider whether a start-up might better suit your goals. An established business offers an existing customer base and cash flow but may come with inherited challenges that need to be aligned with your vision. On the other hand, starting from scratch allows you to build a business tailored to your specifications, though it requires creating a market presence and attracting new customers.

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Engage Professional Advisors Early

Professional advice from a lawyer and accountant is critical when buying a business, ideally from the early stages. Your legal team can help you navigate risks, address key issues, and negotiate favorable terms, while your accountant will assess the financial viability of the venture. Together, these advisors ensure that all aspects of the transaction are legally sound and financially beneficial.

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Finalising the Sale and Purchase Agreement

One of the first steps in buying a business is formalising the Sale and Purchase Agreement. For small to medium-sized businesses, the standard Legal Agreement for Sale and Purchase of a Business (prepared by The Law Association) is widely accepted. Key elements include:

• Vendor and Purchaser Details: Proper identification of both parties.
• Description of Assets: A clear list of what is being sold.
• Price and Payment Terms: Agreed sale price and payment conditions.
• Vendor Warranties: Assurances provided by the seller about the business’s condition.
• Conditions: Terms for financing, due diligence, and trade restrictions.
• Employee Considerations: How existing employment contracts will be managed.

Have your lawyer review the agreement to ensure all critical details are covered and any issues are identified before signing.

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Deciding on the Right Purchasing Entity

Choosing the correct legal structure for purchasing a business impacts liability, tax efficiency, and succession planning. Options include sole proprietorship, limited liability company, partnership, and trading trust. You may want to add “and/or nominee” in the purchaser’s name on the agreement for flexibility, allowing time to discuss the ideal structure with your lawyer and accountant.

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Conduct Thorough Due Diligence

Due diligence is a vital process to confirm the business’s true financial health and operational status. Essential areas to examine include:

• Leases and Licensing Agreements: Ensure all property, equipment, and intellectual property licenses are transferable and valid.
• Supplier and Customer Contracts: Review contracts for stability and long-term sustainability.
• Staffing and Employment Contracts: Assess staffing needs and employee agreements.
• Stock and Asset Valuations: Verify the accuracy of stock and fixed asset values.
• Financial Statements: Analyse several years’ worth of financial statements for revenue trends and liabilities.

Some due diligence tasks can be done before signing to inform your initial offer, but a more extensive review typically follows the agreement.

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Anticipate Time Requirements

While both parties may aim for a quick sale, delays often arise due to third-party involvement, such as landlord consent for property leases. To avoid unexpected delays, allow time for due diligence, financing, and obtaining approvals, which can take several weeks.

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Beyond the Standard Agreement

While the standard Sale and Purchase Agreement covers most scenarios, some situations require additional terms, such as:

• Employee Provisions: Handling specific employee-related issues.
• Vendor Finance: Payment terms where the seller provides financing.
• Earn-outs: Payment adjustments based on future business performance.
• Additional Warranties and Restraints: Specific assurances and restrictions for the seller.

If the business involves multiple shareholders, consider drafting a Shareholders’ Agreement to outline ownership, rights, and dispute resolution processes. This agreement protects all parties in case of future ownership changes or conflicts.

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Consider Relationship Property Implications

Under New Zealand’s Property (Relationships) Act, business ownership may impact relationship property rights. The business could be subject to equal division between partners upon separation, which may affect ownership stakes. Consulting a lawyer helps to navigate these potential implications and ensure your interests are protected.

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Conclusion

Buying a business in New Zealand involves more than just a financial investment; it requires a well-planned strategy, professional guidance, and a solid understanding of the legal and financial complexities. Consulting with a lawyer and accountant early in the process helps you avoid common pitfalls, making for a smoother transaction and a stronger foundation for future success. With the right steps and professional insights, you can enjoy the rewards of business ownership with confidence.