What Are The Legal Considerations When Selling Your Business.

 Most business owners are aware that, at some point, they’ll need or want to sell their business.   Despite knowing that, few business owners put any serious effort into planning for a future sale.  As a result, a sale process can be more stressful than it needs to be. 

 It is important you get both legal & accounting aspects right and use an experienced legal & accounting professional, long before any sale is concluded.   For this purpose, we are using the most common sale method where the vendor is selling the business enterprise and the specific assets needed to run it, rather than selling shares in the company.

1.Review Your Business Contracts & Agreements 

Even in an asset sale, where the buyer won’t necessarily be inheriting all of your liabilities and contracts, both the vendor and the purchaser (and their advisors) will need clarity about what contracts and arrangements have been in place.    

Part of planning, you’ll need to review all of your existing contracts and agreements. This includes agreements with suppliers, customers, employees, landlords, and any other parties your business deals with.   

 Some contracts will need to be transferred to a purchaser, because they’re essential for the business. 

Supplier and Customer Contracts:

Make sure you understand whether any of your contracts allow for the transfer of obligations to the new owner, or have conditions that have to be satisfied. 

 If the business is part of a franchise system, the franchisor will also usually have its own requirements that have to be satisfied before any sale is allowed to proceed.  Enough time needs to be allowed for the process.   

Lease Contracts:    

Typically, the landlord’s consent will be required to give a purchaser the benefit of the lease:

• Landlord is entitled to require certain information before they approve (details of the purchaser’s assets or background, and possibly personal guarantees). 
• It’s worth noting that the assignment or transfer of a lease to a new owner of the business usually won’t release any existing guarantors of the lease from potential liability.  Guarantee obligations should be carefully considered to avoid unpleasant surprises later.  

2.Employee Contracts: 

Both parties need to look closely at all employment arrangements.  A business sale by way of asset sale usually involves the vendor making their staff redundant, and the purchaser then hiring any staff they wish to employ on new contracts. 

Common issues: 

• Vendor is rushing the process, or failing to allow enough time to meet requirements. 
• If this happens, the vendor may be obliged to pay out an employee’s notice period
• A purchaser may have issues with: 
• Key staff having short employment periods or inadequate restraint of trade provisions

3.Intellectual Property Protection

If your business owns intellectual property (IP) such as trademarks, patents, copyrights, or proprietary technology, it’s essential to ensure that this IP is properly transferred to the buyer.

 This can be a complex legal process, as the buyer will want to ensure they have full rights to use and protect the IP moving forward. 

Trademarks and Patents:

These must be legally transferred to the new owner as part of the sale.  If this is addressed late in the process or if the seller fails to register or renew important IP protections, this becomes highly problematic. Allow enough time to ensure these are in order.

Licensing Agreements:

If your business relies on licensed intellectual property, it’s important to review the licensing agreements and determine whether the buyer will be able to continue using them after the sale. 

4.Assets

The purchaser of a business will want to ensure they receive all the assets:

• Review assets required to operate the business.
• Ensure there are no securities or third-party claims on any of the assets. 

 It is common for vendors to want to retain certain assets that they’ve owned through their operating company.  Example, the car that the vendors drive or a personal laptop.   

 It is advisable for a vendor's solicitors to run a PPSR search well in advance, to identify the releases that will likely be required, and prepare early. 

5.Tax Implications 

The tax implications of selling a business can be complex, it’s essential to understand how the sale will impact your personal and business tax situation. Tax laws are subject to change, and each sale structure (asset sale vs. share sale) can have different tax consequences.  You must seek the advice of an experienced adviser, such as an accountant.

Capital Gains Tax

The way a business’s sale price is apportioned can directly affect the tax outcomes for the parties.  Although New Zealand doesn’t currently have a “capital gains tax”, it is possible for sale proceeds to be taxable in certain situations.  For instance, if tangible assets are sold for more than their book value, the vendor may be liable to repay some previous depreciation claims.   

 GST                                                                                                                                                                                  

Goods and services tax (GST) often applies at a 0% rate for sales of a business/assets which is sold as a “going concern”.   Some exceptions can apply, however, and if GST applies in a way a vendor didn’t anticipate, it can come as an unpleasant surprise.   

6.Restraint of Trade and Non-Disclosure Agreements In many business sales, the buyer will request that the seller sign a restraint of trade agreement to prevent them from starting or buying a competing business within a specific timeframe or geographical area. This is designed to protect the buyer's investment and ensure that the seller doesn't undermine the value of the business by competing against it.

The vendor usually wants non-disclosure agreements (NDAs) in place to protect sensitive information about the business from being shared with competitors during the sale process

7.Closing the Deal: Finalising the Sale Agreement

Once the terms of the sale are agreed upon, a formal sale agreement will need to be drawn up. This contract should outline all of the terms and conditions of the sale, including:

• The purchase price and payment terms
• The structure of the sale (asset or share sale)
• Any warranties or representations made by the seller
• Conditions precedent (conditions that must be met before the sale is final)
• The unconditional date of transfer

A lawyer will play a key role in drafting an agreement to ensure that it is legally binding and protects your interests throughout the sale.

Why Work With New Zealand Business Brokers?

The sale process highlights the need to have professionals involved in the sale process. At New Zealand Business Brokers, we understand that selling your business is a complex process, and we're here to guide you every step of the way.

Our team is highly experienced, we're able to help guide you through the sale process from the very outset. If you're considering selling your business (even if that's not for a while), contact us. We're happy to discuss how to navigate the process.