Looking to purchase a business? We can help! There are a number of steps involved in buying a business, and working your way through them can seem quite overwhelming, particularly for first time buyers.
Often prospective purchasers overlook important aspects and end up having to sort out issues that arise after settlement – at significant cost. This article puts the spotlight on common snags people experience when buying a new business.
Choosing a business structure
It’s important that you select the business structure to suit your personal circumstances and business aims. There are four main types of business structures, each with pros and cons:
- Sole trader
- Company, and
- Trading trust.
We can assist you to select the structure which offers suitable protections and bears the appropriate level of risk. Further, we can advise you of the merits of either buying shares in, or assets of, the business.
Structuring the finance to purchase the business can be as complicated as selecting the business structure itself. You may choose to self-fund by lending the business money, or fund the purchase through a financial institution. We suggest this is explored as part of your due diligence.
What’s in a business?
The tangible assets of a business may include machinery, equipment, furniture, fittings, motor vehicles and other chattels.
The intangible asset of ‘goodwill’, which represents the benefit and advantage of the good name, or reputation, of the business is also incorporated into the purchase price.
Vendors usually estimate the value of the ‘stock in trade’ owned by a business, the actual figure to be ascertained by stocktake on settlement. The Sale and Purchase Agreement should provide for a maximum percentage by which this figure can change, so you can rely on the value of stock being within a specific range.
If the business will continue to be operated when it goes to sale, then it’s sold ‘as a going concern’. Under these circumstances, the Goods and Services Tax Act 1985 allows the transaction to be zero-rated for GST purposes. This means that if both parties are GST registered, then there is no GST to pay.
A prudent purchaser will want to ensure that the tangible assets are valued at the market rate to avoid paying unnecessary tax due to over-inflated values.
You may want to seek tax advice to ensure that you satisfy your obligations to the Inland Revenue.
Ensuring continued profitability
The vendor should provide a ‘turnover warranty’ stating the average weekly turnover for the business. The vendor must disclose any one-off events which have led to spikes in turnover for that period, otherwise this may amount to misrepresentation.
Restraint of trade
A ‘restraint of trade’ allows a purchaser to prevent the vendor from competing against them, post-sale, by running a similar type of business within a specific geographical area and time limit.
Restraint of trade provisions must be reasonable. It’s vital to ensure that any restraint of trade is wide enough to cover directors, shareholders and employees involved with the business whom you wish to prevent competing against you.
Buyers often forget to purchase intellectual property associated with a business. If there is a website, or any internet or social media content that you are purchasing with the business, you will need to cover this in the Sale and Purchase Agreement.
As many business operate from leased premises, you must ensure that you have the right to occupy the business premises on terms and conditions which are acceptable to you. There may be an existing lease which will need to be assigned to you – in which case you will need the landlord’s consent.
Employees are a crucial part of a business, and they can have a significant impact on the successful continued operation of that business. If you are buying a business which has current employees, they will technically be made redundant on settlement. We can advise you how to manage the restructuring period, including offering new agreements to the employees whom you wish to retain.
The process of purchasing a business can be time-consuming and confusing. If you are looking at getting into business, we are happy to guide you so that you can focus on the exciting parts of your new venture.