ARTICLE
24 April 2023

Five tips when purchasing a business in NZ

L
LegalVision

Contributor

LegalVision, a commercial law firm founded in 2012, combines legal expertise, technology, and operational skills to revolutionize legal services in Australia, New Zealand, and the UK. Beginning as an online legal documents business, LegalVision transitioned to an incorporated legal practice in 2014, and in 2019 introduced a membership model offering unlimited access to lawyers. Expanding internationally in 2021 and 2022, LegalVision aims to provide cost-effective, quality legal services to businesses globally.
Article lists key points and tips to help you make an informed decision when purchasing a business in New Zealand.
New Zealand Corporate/Commercial Law
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If you want to run your own business but you feel intimidated by the high rate of failure that startups experience, you can look into purchasing an existing business. You can find businesses for sale in New Zealand on online platforms like realestate.co.nz, NZ BizBuySell or Trade Me Marketplace. Alternatively, you can instruct a broker to source potential acquisition opportunities. Before you make an offer, you need to carefully research the business and do your due diligence to ensure you are paying a fair price. This article lists some key points and tips to help you make an informed decision when purchasing a business in New Zealand.

Before You Buy

Purchasing a business can greatly impact your life. Therefore, you should not entertain the decision lightly. Before making an offer, you need to:

  • understand the type of business you are buying;
  • research the target business's market, suppliers and competitors;
  • conduct due diligence before you sign the sale and purchase agreement (or make it conditional on the satisfaction of a due diligence investigation);
  • register your formal interest in buying the business with the person appointed to manage the sale;
  • engage a professional adviser (a lawyer or accountant) to represent you; and
  • ask as many questions as possible about the business to determine whether any underlying issues could impact your revenue post-sale, such as the potential loss of critical customers.

If you are buying a franchise, be wary of large upfront fees or being rushed to buy in. You may be entitled to a seven-day cooling-off period after signing your franchise agreement if your franchisor belongs to the Franchise Association of New Zealand. Franchise agreements can be complicated, so it is best to get legal advice before signing. Alternatively, you could get free advice from the Franchise Association of New Zealand. Before you buy a franchise, you should ask:

  • for a disclosure document that outlines the company's history and track record; and
  • how you are required to pay ongoing costs such as advertising and stock.

1. Do Not Skimp on Your Due Diligence

No matter how tedious or boring, you should never skimp on your due diligence when purchasing a business. This process helps you determine whether the business is profitable and whether the vendor's estimates and projections are over-optimistic. To conduct due diligence on the business, you should check:

  • if the business has any pending court cases or legal disputes;
  • if it owns all key business assets including critical intellectual property;
  • all contracts, including employment, sales, supply, rent and service levels agreements; and
  • if crucial staff members, customers and suppliers are loyal to the current owner; and
  • if all relevant relationships are subject to robust contractual arrangements.

2. Get Legal Advice Before Purchasing the Business

From employment to sales and supply contracts, there are several legal agreements involved in purchasing a business. You should get legal advice to review any clauses or agreements that are confusing or unfamiliar to you. Seeking legal advice will ensure that you do not miss any crucial details.

Your lawyer can also provide you with legal advice on how to structure the transaction. This will manage issues such as limited liability protection, tax and succession planning. You need to consider and resolve these matters before the completion date,

3. Engage an Independent Valuer

You can attempt to value the business yourself, but you need to ensure you have access to the right information. There are some standard methods for valuing a business but getting it right draws on multiple disciplines, including financial statement analysis and market economics. The classic approach to business valuation involves calculating the last three years' average net profit and multiplying it by five. However, this and other popular models fall short by not taking into account growth and risk, and how these are related.

An independent valuer can help you assess the business's value to ensure that your vendor is not asking for an inflated purchase price.

4. Consider a Gradual Handover After Purchasing the Business

Some owners prefer a gradual handover where you pay off the sale price from your profits. This option reassures them that you, as the buyer, will make a success of the business. Therefore, you should discuss this option with your vendor, especially if they seem reluctant to sell or as a way to negotiate down the price.

5. Agree on How to Manage the Business Restructuring

If the target business has employees, you should decide whether you will take over their employment and include this in your sale and purchase agreement. If you choose not to keep the existing staff, the seller must handle any redundancies before you take over.

The Employment New Zealand website provides some guidelines to follow when restructuring a business. This process will depend on:

  • the existing employment agreements;
  • the size of the business; and
  • whether the business employs vulnerable workers.

You can find out more about employee protection provisions in the Employment Agreement Builder.

Key Takeaways

If you want to purchase a business in New Zealand, you need to register your formal interest with the person appointed to manage the sale. However, before you commit time and money to go through this process, it is a good idea to conduct thorough research on the business, including its market, suppliers and competitors. A due diligence process can help you uncover any underlying issues with the business, and an independent valuer can help you assess the business's value to ensure the vendor is commanding a fair price. You should also get legal advice on how to structure your purchasing entity and to review any clauses or contracts you are unfamiliar with. If you are planning to restructure the business, you must follow the Employment New Zealand guidelines and ask the seller to handle any redundancies before you take over.

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