What should the agreement cover?
In the first part on buying or selling a business here we saw there were some big picture things you need to think about when buying a business. This part will look at what the agreement for sale and purchase should cover and some key things that need to be thought through. While written from the point of view of a Purchaser, it will also raise the same issues that a Seller will need to think through.
Assuming the decision is to purchase the business (rather than the shares of the company – this point was touched on above) then a commonly used template agreement in New Zealand is produced by the Auckland District Law Society. While it provides a base and a process it can also be adapted to reflect the situation. In terms of process what usually happens is the agreement gets signed and it is subject to conditions – once those conditions are satisfied it may Just a few examples of the way that it can be customised are:
- Documents to be supplied: We commonly add in many additional terms which relate to the due diligence discussed above and what records will be provided. This usually involves a careful discussion with the client to determine what they expect to see and then being clear about what they have. If you ask for a licence that the seller should have and they cannot provide it, then obviously a red flag goes up.
- Conditions: These could include the purchaser arranging finance for the purchase by a certain date, being satisfied with the results of the due diligence, having the lease (if there is one) assigned to the purchaser, obtaining consents or licenses needed. Again, this will vary depending on the business so there is no standard wording that can just be pasted in.
- Warranties: It is common to include warranties – these are essentially statements by the Seller about the state of the business. For example, a warranty might state that there is no litigation that the company is a party to. Often these will be subject to robust negotiations – for example, the Seller may want this to say “as far as I am aware” (a knowledge qualifier), or refer to a monetary value such as there being no disputes above “x” dollars (a monetary threshold qualifier).
- Restraints: It is common to include restraints on the seller of the business – particularly if it were, for example, a catering business or there was potential that they start something new that competes. Restraints need to be reasonable and usually will involve a certain time period such as one year and there will be a geographic area which is specified. Again, this can be a point of rigorous negotiations.
- Intellectual property: Goodwill and reputation often make up a big part of the value of the business which is being purchased so it is important to be clear about what that includes – for example, names (are they trademarked?), website, Facebook pages, client lists, patents or other registrations.
- Contracts: As part of the due diligence it is important to look at the really key contracts for the business and focus on whether they have change of control provisions and/or the ability to novate or assign to a purchaser. It might be that there will be issues with the purchaser taking on contracts so that is important to find out as quickly as possible.
- Tax and accounting: We always advise involving an accountant to assist with these aspects and confirming with them the tax position – for example, that the transfer will be free of GST. Most of the time both entities will be registered for GST and no GST will be charged but it is far better to get this clear from the start than needing to have a last minute panic.
As I said in the first article, the key thing is to remember that every transaction will be unique and so it is important to take a customised approach to what you ask for in the agreement, whether you are a buyer or seller. If you’d like to talk about your plans then I’d be happy to have a chat or drop me a line at firstname.lastname@example.org