TAKING A LEAP – BUYING A BUSINESS

Posted by Dasha Kovalenko-Gormack on September 23 2022 in News

Buying a business is risky, but big risks can have high rewards. If you are thinking about taking the plunge and buying a business, here are some things to consider:

What are you buying? ­­­

Be clear on what you are buying. Are you buying just assets and/or shares? If it is the latter, be aware that this can be a riskier option (as you will take the risk of any future liability the company may incur, such as tax) and generally requires more in-depth due diligence. Make sure you are paying fair value for what you are purchasing – this can be done by way of obtaining valuations and/or discussions with your accountant as to the methodology used in calculating key metrics.

Have you done your homework?

Make sure to conduct your due diligence before entering into an unconditional agreement OR include a due diligence condition into the agreement. When incorporating the due diligence condition, make sure to give yourself ample time. Your due diligence will not just extend to legal due diligence but will also extend to other matters such as employment, accounts, and contracts (to name a few). Your lawyer will be able to provide you with some key questions you’ll have to ask during the due diligence period.

Are you taking anyone on?

Will you need to take on staff as part of the business purchase? In some instances, it is a requirement under the law (e.g., catering industry). In others, it may be a person that is critical to the operation of the business. If that’s the case, make sure you review the employment arrangements, and be clear on who is paying their entitlements on settlement.

What are the key contracts?

As part of your due diligence process, you will need to ensure you are across all the key contracts that are material to the business. These may include supplier agreements or contracts that you will be subject to with your new customers, for example. Your lawyers should be reviewing any contracts that you are taking on, to ensure you are aware of your obligations going forward and if there is any ability to renegotiate. 

Where will you operate the business?

Leases are usually a key component of a business purchase as they secure premises for you to operate from. Either the current lease will need to be surrendered by the vendor and a new one entered into by you as a new tenant, or you will need to take over the existing lease, which may not be the vendor’s preference as it keeps them on the hook for any breaches.

How will you finance the purchase?

If you need finance, make sure you either have that lined up or pre-approved before entering into an unconditional agreement, or make the agreement conditional on finance. Your financier may require further information as part of the conditions of your funding so make sure that if the agreement is conditional on funding, the condition date is long enough for you to comply with these requirements.

Although there are some common issues and/or considerations (including those noted above) that will arise in most acquisitions, no two businesses are the same and no two acquisitions will be the same. Having the right team in your corner is critical to ensuring risks are mitigated and/or understood and the transaction is completed smoothly. In most cases, this will involve collaboration between lawyers, tax and accounting specialists. 

Feel free to contact our team if you need assistance on either a sale or a purchase of a business.

Richard Hatch | Partner| Richard.Hatch@shieffangland.co.nz

Dasha Kovalenko-Gormack | Senior Associate | Dasha.Kovalenko@shieffangland.co.nz