Top Tips for Buying a Business.

Buying a business can be complicated. It's so important to gain a complete understanding of the process and to have someone on your side to help identify potential risks and know how to minimise them. Our team have summarised some key points to consider when looking into purchasing your next business venture.

1. Undertake Comprehensive Due Diligence.

The importance of a thorough due diligence process cannot be over stated. A purchaser should ensure that they know all about a business before committing to buy it. Important aspects of due diligence include:

• Review of the business’s leasing arrangements to ensure they are satisfactory.
• Review of customer and supplier relationships, and the supporting contracts.
• Consideration of staffing levels and contracts, and interviews with key staff.
• Analysis of any intellectual property rights that are being purchased as part of the business.

In addition to the above, the purchaser should consult with their accountant and undertake a detailed analysis of the last several years financial statements, and other financial information about the business.

2. Allow Enough Time.

The buyer and seller will usually want to complete the transaction as quickly and efficiently as possible. However, other parties are likely to be involved that are looking after their own interests, and in doing so can cause delays if proper processes aren’t put in place. For example, if the business is located in a leased property, the landlord’s consent will be required for the purchaser to take over the lease. A landlord’s main interest is in protecting its investment, rather than having a new tenant in the property as soon as possible. A purchaser will need to demonstrate to the landlord that it has the right business experience and is in a good enough financial position to take on the tenancy, and a landlord may take some time to assess these matters. Also, a vendor may not want to tell their landlord that they are selling their business until the purchaser has confirmed that any other conditions in the sale and purchase agreement, such as finance and due diligence have been satisfied. So, from the time of signing a sale and purchase agreement, a purchaser may require a few weeks to undertake their due diligence and to arrange finance, and then more time will be needed for the vendor to arrange landlord consent.

3. Correctly Drafted Sale and Purchase Agreement.

Fortunately, a large number of business purchases are completed using the standard Auckland District Law Society Agreement for Sale and Purchase of a Business. However, there are also a number of situations that are not included in the standard agreement that need to be considered when purchasing a business and these will need to be recorded as "further terms". It is important that these terms are drafted correctly, so ideally they should be prepared by a lawyer, or a lawyer should at least review them before the agreement is signed. Some common further terms are:

• Those relating to employees.
• How work in progress at the settlement date is to be dealt with.
• Any purchase price "earn out" arrangements.
• Details of any vendor finance terms.
• Further vendor warranties about the business.

4. Have a Shareholders Agreement.

If the purchaser is to be a company that has more than one shareholder, it is very important that a Shareholders’ Agreement is prepared to record the rights and obligations of each person. People going into business together often think they will get on well forever, but things change and this isn't always the case. It can be tempting to put off preparing a Shareholders’ Agreement, but doing so will almost always result in more problems and expense later on. A Shareholder Agreement will usually cover things such as:

• What will happen if a shareholder gets a long term illness and can no longer work.
• The process to follow if a shareholder wants to sell their shares.
• How the shares are to be valued in the event of a sale.
• Details of any restraints of trade on a party who has sold their shares.
• And importantly, the process to follow in the event of a dispute between shareholders.

 

Our experienced team of commercial lawyers can offer advice and assist with all of the above matters. If you’re considering buying a business, we highly recommend that you meet with one of our team as early in the process as possible, this will help to ensure things run smoothly and efficiently.

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