March 12, 2019

Buying a Business – The Contract

In January we looked at some of the essential considerations, particularly GST when contemplating the sale or purchase of a business.

Let’s now look at some of the contract requirements for the sale and purchase of a Business.

As mentioned last month, most businesses are bought and sold under the contract format often referred to as the REIQ format contract.

All contracts need to be certain – by that, lawyers mean the particulars of the contract should be correct and, in particular, there should be absolute certainty as to what is being sold.

Most business sales will now include not only a business name, but also a domain name and email addresses together with the usual telephone and fax numbers.

It is important that you have details of your business name (including the registration number) and once the business name is recorded as under contract, that you have the corporate key which has to be handed over at settlement to the Buyer.

Domain name/s will need to be transferred as well and it is very likely that that will be a job for you because registration details etc will be held by you.

When the sale price is being established, you will need to determine if the sale price will include stock or whether or not the stock will be listed as a separate item and if it is to be added to the sale price.

As the seller of a business, you will be asked if you want to apportion the sale price.

This means, do you want to break up the sale price into goodwill, plant and equipment etc. The modern trend is not to split up the sale price.

The seller will have established its tax position so splitting the sale price into the various constituent parts could have tax implications for the seller. If the seller wants to split up the sale price then the seller should take advice from and accountant or business advisor.

A buyer of the business should do likewise. Professional advice on how splitting up the sale price might impact taxation issues is essential.

The only other thing to mention about splitting the sale price is that it often leads to disagreements between the seller and the buyer – not something that is conducive to a happy sale process when it can all be so easily avoided.

Two more important considerations are the areas of requisitions and employees.

When it comes to various types of businesses, as a buyer you will need to be aware that there could be requisitions in play. If for example, you are buying a business which involves food preparation then you can be certain that Council will need to do an inspection of the business premises. This could result in work being required to be done to bring the premises up to a condition which meets required health standards etc.

This issue needs appropriate consideration.

Employees of the business need to be particularised clearly in terms of their position within the business, period/s of employment, rates of pay etc.

Employee entitlements are transportable for the most part. This could apply even though an employee is not a permanent employee of the business.

If, as buyer, you are to retain any employees of the seller then there is an obligation [in the Standard Terms of Contract] placed on the seller to make a payment of 70% of the value of entitlements.

As buyer you will need to determine early in the sale process if you want to retain any employees of the seller. There will be obvious issues relating to whether or not to retain employees but other important considerations will include whether or not a particular employee is approaching a particular mile stone in terms of entitlements. If you are going to retain an employee, then you need to go into this with your eyes open.

Always remember that once the contract has been signed, as the buyer you’re bound unless you have escape clauses such as finance, due diligence and the like.

Tread carefully and also take sound professional advice – Lawyers and Accountants deal with business sales each and every day. They’re trained to assist in the negotiation and management of business sales and purchases, so make good use of professional advisors.