How a North Shore commercial lawyer can help when buying a business
Each year lots of people decide they want to own a business. Arguably, that is the easiest part of the whole process because there are many hurdles to clear before you can start trading. To own a business there are two obvious routes– starting a new one or buying an existing business. This article will consider some of the many legal issues for people who choose to buy an established business and have already identified one that interests them.
Start your due diligence
Many people might believe that the pre-purchase phase is mainly concerned with the financial due diligence. While that is a crucial element and is the factor which to a large extent determines the value of the business, there are many other facets to take care of once the price has been agreed.
The best approach once you have initiated the due diligence with an accountant is to make contact with a commercial lawyer so that they can begin their role in the process.
Start your due diligence
Many people might believe that the pre-purchase phase is mainly concerned with the financial due diligence. While that is a crucial element and is the factor which to a large extent determines the value of the business, there are many other facets to take care of once the price has been agreed.
The best approach once you have initiated the due diligence with an accountant is to make contact with a commercial lawyer so that they can begin their role in the process.
Purchase of the business
Obviously for a sale to proceed the person or entity selling the business must be the legal owner or have appropriate authority to act on behalf of the lawful owner. With that in mind, the solicitor will ask for documents from the seller’s lawyer showing ownership. Alternatively, if it is a limited liability company that is involved, the lawyer can make enquiries with the Companies Office to verify shareholdings and directorships. They can also confirm if the company has been correctly registered and that all records are up-to-date.
The lawyer will also prepare the actual sale contract. In Auckland, for privately owned businesses, this will usually be undertaken using the real estate sales and purchase agreement.
This leads to another issue to discuss with your accountant and solicitor and that is the ultimate entity that will purchase the business. It may be you as an individual which is known as a sole-trader even though you may have employees, it could be you along with a partner. Another option is that you buy the existing company or form a new one to purchase the business or finally, some form of Trust buys the business. The decision will depend on many things and will be different for each person depending on their ultimate objectives.
At the completion of the process, if you have used a company for the purchase or have bought a company, then your lawyer can update the Directors’ and Shareholder details at the Companies Office with your new details.
Financing the deal
A key factor in the negotiation of the sale arrangement will be the payment terms. People new to buying a business may expect that the full price will be paid for on settlement but this is often not the case.
Where payment is to be made on settlement then the buyer must arrange suitable financing to be available on the date of final purchase. For some people this may be cash they already have, arranging finance on their house or raising funds from a third party such as a bank or finance house.
However, a common arrangement with the sale of a business is known as vendor financing. In simple terms this means that the seller is willing to accept part-payment on the settlement date and receive payments over the longer-term. If this is the case, then there may be a further issue of interest payments to be taken into account. Whatever, the decisions, everything must be clearly noted as part of the sale agreement.
Financial contracts
Another aspect of the topic of finance and contracts relates to commercial activities in the business. These can include leases for premises, lease or hire purchase of plant and machinery, supplier and customer agreements and terms of trade. All of these can have a significant impact on your potential business. For example, the existing terms of trade may give customers extended credit or they may not explicitly state that you would retain ownership until full payment is received. These need to be changed.
Alternatively, there may be a key piece of equipment. Does the lease or hire purchase agreement cater for the sale of the business? What are the financing costs of those agreements and are you bound by them or do you have an opportunity to negotiate better terms?
All of these and many others are key issues which your commercial lawyer is best suited to solve for you.
Obviously for a sale to proceed the person or entity selling the business must be the legal owner or have appropriate authority to act on behalf of the lawful owner. With that in mind, the solicitor will ask for documents from the seller’s lawyer showing ownership. Alternatively, if it is a limited liability company that is involved, the lawyer can make enquiries with the Companies Office to verify shareholdings and directorships. They can also confirm if the company has been correctly registered and that all records are up-to-date.
The lawyer will also prepare the actual sale contract. In Auckland, for privately owned businesses, this will usually be undertaken using the real estate sales and purchase agreement.
This leads to another issue to discuss with your accountant and solicitor and that is the ultimate entity that will purchase the business. It may be you as an individual which is known as a sole-trader even though you may have employees, it could be you along with a partner. Another option is that you buy the existing company or form a new one to purchase the business or finally, some form of Trust buys the business. The decision will depend on many things and will be different for each person depending on their ultimate objectives.
At the completion of the process, if you have used a company for the purchase or have bought a company, then your lawyer can update the Directors’ and Shareholder details at the Companies Office with your new details.
Financing the deal
A key factor in the negotiation of the sale arrangement will be the payment terms. People new to buying a business may expect that the full price will be paid for on settlement but this is often not the case.
Where payment is to be made on settlement then the buyer must arrange suitable financing to be available on the date of final purchase. For some people this may be cash they already have, arranging finance on their house or raising funds from a third party such as a bank or finance house.
However, a common arrangement with the sale of a business is known as vendor financing. In simple terms this means that the seller is willing to accept part-payment on the settlement date and receive payments over the longer-term. If this is the case, then there may be a further issue of interest payments to be taken into account. Whatever, the decisions, everything must be clearly noted as part of the sale agreement.
Financial contracts
Another aspect of the topic of finance and contracts relates to commercial activities in the business. These can include leases for premises, lease or hire purchase of plant and machinery, supplier and customer agreements and terms of trade. All of these can have a significant impact on your potential business. For example, the existing terms of trade may give customers extended credit or they may not explicitly state that you would retain ownership until full payment is received. These need to be changed.
Alternatively, there may be a key piece of equipment. Does the lease or hire purchase agreement cater for the sale of the business? What are the financing costs of those agreements and are you bound by them or do you have an opportunity to negotiate better terms?
All of these and many others are key issues which your commercial lawyer is best suited to solve for you.
Staff employment contracts
The issue of employment contracts or agreements is extremely tricky. This is definitely an area where you must talk to a lawyer. Often the buyer of a business thinks they can lay-off any unwanted staff. That is not usually the case. Employment law is extremely complex and you should never attempt to manage employment issues without the expert guidance of an experienced employment lawyer. In fact, your commercial lawyer will probably include the employment law specialist from their firm for these aspects as it is a potential minefield if you get things wrong.
The role of the seller
When buying a sole-trader type of business it is very common for the seller to be retained for a hand-over period. The extent of the hand-over can vary greatly. It can be as simple as a couple of weeks showing you what to do , from a lengthier stay in the business, to a consultancy role for a defined period or even becoming an employee of the business.
This last situation is often the case if the founder was an engineer or designer but they didn’t like or have the business skills to grow the business. Often for them, getting rid of the management of the business so they can go back to what they love best, is a relief. This can be a great outcome for all parties.
However, if the seller is not going to have an active role in the business then it is essential that there is a form of restraint of trade. This means they seller cannot open in competition with o in a defined geographical area or period of time. The last thing you need is for the old owner to poach your customers or suppliers so make sure this is firmly in place.
Conclusion
This article is a short description of some of the legal issues you have to address if you are buying a business. All of them are complex in law and failing to follow them is likely to cost you a lot of money in the future.
The good news is that most of these situations are common so both your lawyer and the other party’s solicitor will be well aware of them and can advise both you and the seller how to work with them. It need not be confrontational, rather it is much more likely to bring about a professional, clearly understood and amicable transaction so call a commercial lawyer on the North Shore if you are buying a business.
The issue of employment contracts or agreements is extremely tricky. This is definitely an area where you must talk to a lawyer. Often the buyer of a business thinks they can lay-off any unwanted staff. That is not usually the case. Employment law is extremely complex and you should never attempt to manage employment issues without the expert guidance of an experienced employment lawyer. In fact, your commercial lawyer will probably include the employment law specialist from their firm for these aspects as it is a potential minefield if you get things wrong.
The role of the seller
When buying a sole-trader type of business it is very common for the seller to be retained for a hand-over period. The extent of the hand-over can vary greatly. It can be as simple as a couple of weeks showing you what to do , from a lengthier stay in the business, to a consultancy role for a defined period or even becoming an employee of the business.
This last situation is often the case if the founder was an engineer or designer but they didn’t like or have the business skills to grow the business. Often for them, getting rid of the management of the business so they can go back to what they love best, is a relief. This can be a great outcome for all parties.
However, if the seller is not going to have an active role in the business then it is essential that there is a form of restraint of trade. This means they seller cannot open in competition with o in a defined geographical area or period of time. The last thing you need is for the old owner to poach your customers or suppliers so make sure this is firmly in place.
Conclusion
This article is a short description of some of the legal issues you have to address if you are buying a business. All of them are complex in law and failing to follow them is likely to cost you a lot of money in the future.
The good news is that most of these situations are common so both your lawyer and the other party’s solicitor will be well aware of them and can advise both you and the seller how to work with them. It need not be confrontational, rather it is much more likely to bring about a professional, clearly understood and amicable transaction so call a commercial lawyer on the North Shore if you are buying a business.