In this article, Auckland lawyer Ian Mellett of Quay Law Barrister and Solicitors discusses some of the legal matters that you should consider when deciding to purchase a business.
The decision to purchase a business is both exciting and daunting. On the one hand it signifies the start of a new venture, yet on the other it raises the uncertainty and risk inherent in any commercial undertaking. You may also be unsure as to whether to buy an existing business or to start your own from scratch. Generally speaking when you buy an existing business, there should be existing customers from day one which will ensure an instant cash flow. However if you start from scratch, then you will need to generate new customers. Both approaches have their own hurdles that you will need to overcome, and particularly so in light of the tough economic climate currently prevailing. It is important that you engage your professional advisors at an early stage in the process. Your lawyer and accountant, along with a business broker if there is one involved, are well placed to give you the necessary input and advice to enable you to make an informed decision. There are various aspects which require careful consideration. Some of these are set out below:
The Agreement
It is preferable to use the standard Legal Areement for Sale and Purchase of a Business which has been compiled, and amended over the years, by the forms committee of the Auckland District Law Society. The agreement, much like its counterpart for residential and commercial property transactions, is designed to cater for the needs of both the vendor and the purchaser. Always ask your lawyer to cast his eye over the agreement before you sign the document. There are a number of things that need to be considered, including the names of the vendor and purchaser; what is being sold; the price; terms of payment; warranties by the vendor; conditions such as the obtaining of suitable finance, solicitor’s approval (if appropriate) and due diligence; possible restraints of trade and all issues relating to existing employee contracts.
Purchasing Entity
It is recommended that the purchaser be reflected as (name)….. “and/or nominee.” This will give you the opportunity to discuss the most appropriate purchasing entity with your lawyer and accountant. Issues such as limited liability protection, tax, succession planning and the like, all need to be considered prior to settlement. There are various options, including but not limited to sole proprietorship; partnership; limited liability company and trading trusts. I will discuss the advantages and disadvantages of these entities in an article sometime in the new year.
Due Diligence
This is the most important aspect of any business purchase, as it provides you with an opportunity to perform an in-depth analysis across the entire spectrum of the business. Your accountant will be able to assist you in inspecting the financial statements for the past 3-5 years (this will vary from business to business) in order to judge the “financial health” of the business, and to raise any concerns or request further information if necessary. Your lawyer will be able to assist you with all the legal aspects of the due diligence process. These include, but are not limited to, reviewing all lease and/or licensing agreements; patents and copyright (if any); stock valuations, and evidence of ownership of equipment and assets (and whether these are unencumbered or not). He will also ascertain what is being sold namely the business and its assets, or the shares. The last issue is extremely important, as it will determine how certain aspects of the purchase need to be dealt with from a taxation perspective. Generally, due diligence only needs to be done once you have signed the Agreement. However, in practice, much of this work is often done in finding out about the business and in determining what amount to offer. Now you will need to decide! Due to space constraints, I have only briefly touched on some of the more significant aspects which you need to consider when purchasing a business. My recommendation is that you consult your lawyer (and accountant) early in the process to ensure that the proposed transaction proceeds smoothly. There is a cost associated with obtaining professional advice, but it is my experience that this will be far cheaper than the cost of getting it wrong.
Please feel free to contact Ian Mellett (BComm LLB H Dip Tax) at Quay Law. (Phone 09 5232408)
Our Legal Website: http://www.quaylaw.co.nz
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