An Agreement for Sale and Purchase of a Business is the agreement between the owner of a business (the vendor) and a purchaser relating to the sale of the goodwill and assets (both tangible and the intangible) and any stock (“Agreement”).
In New Zealand, the most common form of Agreement used is produced by the Auckland District Law Society Inc. Even when this Agreement has been used there will usually need to be additional and specific clauses added.
For a purchaser the main points to consider when negotiating an agreement to buy a business are:
- Who will be the purchaser?
You could own and operate the business as a sole trader, in partnership with one or many other owners, or through a company or trust. Another option is to use one entity to own the assets of the business and another entity to operate the business.
- A good due diligence investigation
Involve your accountant in this process as there are many ways of valuing a business. You may only be able to get limited financial information prior to making your offer so your offer should be subject to a due diligence condition to allow you time to investigate the business. A good due diligence clause will allow you to cancel your purchase or to renegotiate the terms (including the purchase price) if required.
During the due diligence period, take the time to look beyond the financials and obtain other information regarding the business’ reputation. Research the market to determine whether demand for the product or service is increasing or decreasing. Research the competition. Ask whether it is a business that is easy to replicate and whether there is any point of difference for the business.
The vendor should provide you with a thorough list of all business assets. You need to consider:
- Is maintenance up to date? What is the cost of repairing or replacing?
- Are the statutory requirements being met as to licensing and inspections?
- Does the business need to invest in new technology to keep it competitive?
- Does the vendor lease any assets?
The values attributed to the assets in the Agreement can have a significant effect on your ongoing balance sheet and depreciation entitlement so you should check these figures with your accountant.
If there is a lease you need to be comfortable with the length of the remaining lease term and the obligations of the lease. You may want to negotiate new terms with the Landlord.
You may want to make it clear that you will only purchase the business if key staff accept your employment terms. Review the vendor’s role in the business to ensure that the business can continue without them.
- What warranties should you include in the Agreement?
Warranties are promises that the vendor makes to you about the performance and quality of their business. You can sue the vendor after settlement if the warranties turn out to be incorrect. Be mindful that warranties are only as good as the financial backing of the vendor after the sale. Ensure that the Agreement is personally guaranteed by the directors of the vendor company.
The standard Agreement includes warranties from the vendor. These include warranties that the assets are in good operational order, staff entitlements are met (e.g. holiday pay) and the turnover figures provided are correct. Consider whether you need to add any other warranties that are specific to the business
A restraint of trade is when a vendor, and parties related to the vendor, agree not to compete with a business it is selling. The restraint can stipulate a period of time, certain geographic areas, or an agreement not to try to lure away clients or employees. Restraints must be reasonable to be enforceable.
Whether you are a vendor or a purchaser of a business, it is essential that you obtain professional advice from both an accountant and a lawyer.