Selling a Business in NZ: Your Ultimate Guide

20 February, 2024 | Chantal Laidler

Deciding that it is time to sell your business is a momentous step for any business owner. In this article, we will explore the different considerations and crucial processes a business owner will need to consider when navigating the sale of a business.

Where to start?
Starting with a team of experts and making sure your business is in a strong position for sale will minimise the stress of selling your business, maximise your returns and ensure a smooth transition to the next owner. Even if your business is relatively small, it is likely that you have put a substantial amount of time, effort, and funds into the business, so it remains important to seek expert legal and accounting advice to ensure an appropriate return and that you are not left open to future claims or disputes.

A comprehensive Agreement for Sale and Purchase is vital, with terms favourable to you and your business. This can be drafted by either party’s lawyer — but ought to be approved by your lawyer before it is signed to ensure that the terms accurately protect your interests and reflect your intentions. Among other things, the Agreement will detail exactly what is being sold. This assists with the purchase price breakdown between tangible and intangible assets, and stock (if any) — which should be decided in collaboration with your accountant. Your accountant will also ensure your finances are up to date so you can safely provide the financial warranties contained within the Agreement.

 

Employees
The treatment of employees in a sale is a pivotal concern to create continuity within the business and meet employment law requirements. You should ensure your employee records are up to date and all employees have signed employment agreements. Providing sufficient notice to employees, and the termination or transfer of employee entitlements, will be important factors to consider and can affect the purchase price and timing of settlement.

The purchaser may also opt for the owner of the business to stay working in the business for an agreed period to ensure a smooth transition and appropriate training – in addition to the vendor assistance period the vendor is obliged to provide. This will be negotiated by the parties and set out in the Agreement for Sale and Purchase, and your solicitor will work with you to ensure that these terms appropriately reflect your wishes and intention for the future.

 

Preparing the Business for Sale
If your business has a leased premises, you will need to ensure that you have a valid lease. This is an important step in preparing your business for the purchaser’s due diligence and enabling you to assign your rights and obligations (with the landlord’s consent) to the purchaser. This will need to be a Deed of Lease, rather than an Agreement to Lease as the latter cannot be assigned. Reviewing the term left on the lease is also important, to ensure this forms part of the attractive deal to any potential purchasers. If you are a guarantor under the Deed of Lease, it would be ideal to negotiate a surrender of lease with the landlord, with a new lease prepared on similar terms for the purchaser, so that your liability does not continue. However, the landlord will need to consent to either the assignment or surrender and new deed of lease and will likely require information from the incoming purchaser (such as business ownership history and assets/liabilities) to ensure the new tenant is suitable.

Existing Commercial contracts & agreements
Due diligence preparation should also include reviewing and collating any key supplier and customer agreements and ensure these can be assigned or novated to the purchaser. Any other agreements to lease e.g. of EFTPOS terminals, will also need to be assigned to the purchaser upon settlement so it is a good idea to review the terms of these agreements.

Security Registrations
You should also consider whether any assets being sold have security registered against them on the Personal Property Securities Register – the relevant financing statements will need to be discharged before, or upon settlement (your solicitor can attend to this on your behalf or you can organise it yourself).

Intellectual property
Clearly defined and protected intellectual property will make your business an attractive investment and can form a significant component of the purchase price. You lawyer can advise on protecting and registering your intellectual property before you sell, and the transfer of these rights as part of the sale. A Deed of Assignment of Intellectual Property should be prepared once the Agreement is unconditional and prior to settlement to assign any intellectual property rights to the new purchaser.

Restraints
The Agreement for Sale and Purchase typically also contains a restraint provision in respect of the outgoing vendor. It is therefore necessary to consider what your future plans are to ensure that your intentions are weighed fairly against the purchaser’s wishes for protection against you setting up a similar business and competing with them.

 

Settlement and Post-Sale Considerations
Once any conditions in the Agreement for Sale and Purchase have been satisfied and the matter progresses to settlement, the assignment of any supplier agreements, leases and intellectual property will need to occur, final stocktake (if relevant) and of course the transfer of funds from solicitor to solicitor.

Typically, where inventory forms a part of the business being sold, the final stocktake is completed immediately prior to settlement by both parties. In most cases the Agreement will contain a maximum percentage stock value adjustment, so it is important that the initial estimate of stock in trade is as accurate as possible to limit any surprises to either party. In larger transactions there may be a final ‘wash up’ after settlement and some funds may be held in the solicitor’s trust account until this is complete.

Both parties will also need to address post-settlement considerations, including any vendor assistance period specified within the Agreement, warranties and indemnities outlined in the Agreement and transfer of any assets which are wrongly allocated after settlement.

The Agreement may also state that the purchaser can use your company name after settlement – this will mean that you need to promptly change any registered company name in the days after settlement.

 

What does it cost?
Each business and business owner’s circumstances are unique, which is why it is important to receive tailored, well rounded legal advice before and during the sale process. The estimates below are based on standard sales, and we will be able to provide you a personalised estimate once you have discussed your business with you.

At the time of this article, legal fees for the sale of small businesses without employees or a premises, valued below $200,000.00, will generally be in a range between $2,500.00 to $5,500.00 (plus GST, disbursements etc.).

For businesses valued above $200,000.00 legal fees will generally be in a range between $4,000.00 and $6,000.00 (plus GST, disbursements etc.).

Legal fees for sales of businesses above $1 million generally start from $7,500.00 (plus GST, disbursements etc.).

These estimates do depend on factors including complexity and urgency (and e.g. how the lease and employment aspects play out).

As we have discussed above, there are a number of important factors to consider once you decide to sell your business and throughout the process. Expert advice can minimise stress and ensure that both parties have a positive experience and outcome.

Ready to embark on the journey of selling your business but unsure where to start? The complexities of preparing your business for sale, navigating legal obligations, and ensuring a smooth transition to the new owner can be overwhelming. But you don’t have to navigate this path alone. Whether it’s understanding the intricacies of employee transitions, safeguarding your intellectual property, or ensuring your sale agreement is comprehensive and favourable, expert advice is crucial. Reach out today for personalised, expert legal guidance to streamline your business sale process, maximize your returns, and secure a future that aligns with your vision. Let’s make your transition as seamless and rewarding as possible.

Contact Chantal Laidler today!

Phone: +64 9 837 6833

Chantal.laidler@smithpartners.co.nz