Most NZ business sales use the standard Agreement for Sale and Purchase of a Business, with clauses added or changed to suit the deal. Here's what's in it and what sellers should look at closely.
This page is general information. Your lawyer should review any agreement before you sign, and your broker is required to recommend that you get legal advice.
The key sections, and what to check
Parties and the business
Who is selling and who is buying. If you trade through a company, the company is usually the vendor. Buyers sometimes sign "or nominee", which lets them buy through a company or trust set up later. If so, check whether the original signatory stays liable.
Price and how it's split
The price is usually divided between goodwill, plant and equipment, and stock, with stock often added at settlement.
How the price is split matters for tax. Since 1 July 2021, purchase price allocation rules generally require buyer and seller to use the same allocation across asset classes where total consideration is $1 million or more. The simplest approach is to agree the allocation in the agreement itself. If it isn't agreed, the seller generally has three months after the change of ownership to notify an allocation, and then the buyer has a further window. Talk to your accountant before the split is set, because it affects depreciation recovery and what you keep.
Deposit
The buyer pays a deposit, usually 10%, into the broker's trust account. The agent generally has to hold money received for 10 working days before releasing it. The agreement sets out when the deposit becomes payable and what happens to it if the sale falls over.
GST
If you and the buyer are both GST-registered and the business is sold as a going concern, the sale is usually zero-rated. The agreement records this. If the sale doesn't qualify, the price needs to state whether it includes GST. Getting this wrong can cost 15% of the price, so have your accountant confirm the position.
Conditions
Conditions protect one or both parties until they're satisfied. Common ones include:
- Finance: the buyer's bank approves lending.
- Due diligence: the buyer is satisfied with the figures, lease, staff and compliance.
- Lease assignment: the landlord consents to the lease passing to the buyer.
- Franchisor approval: for franchise resales.
- Licences: the buyer obtains any licence the business needs to trade.
Each condition has a date. Keep them tight. Loose or open-ended conditions let a buyer hold your business off the market for weeks.
Stock
The agreement usually provides for a stocktake on or just before settlement, with stock valued at cost. Some agreements cap the amount of stock the buyer has to take, or exclude damaged and obsolete stock. Agree how it's counted and who does it.
The lease
Most business sales involve assigning your lease to the buyer, which needs the landlord's written consent. Landlords commonly ask for the buyer's financial details and sometimes a guarantee.
Check whether you, or anyone who personally guaranteed the lease, will stay liable after assignment. Many leases keep the original tenant or guarantor responsible if the buyer defaults. Your lawyer may be able to negotiate a release.
Restraint of trade
The buyer will want you to agree not to compete for a set time within a set area. A restraint has to be reasonable to be enforceable, so it's usually tied to the business's actual market. Think carefully before agreeing to a wide one, particularly if you plan to stay in the industry.
Training and handover
The agreement usually sets out a training period after settlement, for example a few weeks, and may cover how many hours a week you'll be available. Make sure it's realistic and clearly defined.
Employees
In a typical asset sale, your staff's employment with you ends at settlement, and you pay out final wages and holiday pay unless the agreement says otherwise. The buyer may offer new employment. In some industries, including cleaning and food catering, employees have the right to choose to transfer to the buyer on their existing terms. Your lawyer will make sure the agreement deals with this properly.
Warranties
You'll be asked to confirm things such as the accounts being accurate, there being no undisclosed debts or disputes, and the business complying with the law. Warranties can lead to claims after settlement if they turn out to be wrong. Read them carefully and disclose anything that might be an issue.
Settlement and apportionments
On settlement, the lawyers prepare statements that apportion rent, rates, outgoings and any prepaid amounts between you and the buyer. The buyer pays the balance and takes possession.
Common mistakes sellers make
Signing before your lawyer has seen it. An agreement is binding once signed, even with conditions.
Leaving the price allocation until later. It's simpler to agree it at the start than to sort it out after settlement.
Agreeing to a vague handover. "Reasonable assistance" can mean very different things to you and a buyer.
Forgetting about the lease guarantee. Selling the business doesn't automatically release you from the lease.
Where we fit
We prepare the agreement terms with you and the buyer, negotiate the commercial points, and keep conditions moving to their deadlines. Your lawyer handles the legal review and settlement. Getting your records in order before this point, through vendor due diligence, makes the conditional period much smoother. Before you agree the price split, get your accountant's view on tax when selling a business in NZ, particularly GST and depreciation recovery.
If you're starting to think about a sale, a free, confidential business appraisal is the first step.