The Most Expensive Words in a Business Sale: “We’ll Sort That Out Later”

Buying or selling a business is often the culmination of months, and sometimes years, of hard work. Once a vendor and purchaser have agreed on a price, there can be a strong desire to get the agreement signed as quickly as possible and leave any remaining details for the lawyers to sort out later.

Unfortunately, that approach can be an expensive mistake.

One of the most common causes of delay, increased legal costs and disputes in business sale transactions is not a legal problem at all. It is a failure by the parties to fully agree the key commercial terms before signing the agreement. Matters that may seem minor at the outset can quickly become significant issues when settlement approaches and the parties realise they have very different expectations about what has actually been agreed.

This is particularly relevant when using the Agreement for Sale and Purchase of a Business approved by the Real Estate Institute of New Zealand Incorporated and by Auckland District Law Society Incorporated (the latter commonly now known as The Law Association of New Zealand) (REINZ/ADLS Agreement), which remains a commonly used form of agreement in New Zealand. While the agreement provides a comprehensive framework for documenting a business sale, it cannot generally resolve commercial issues that the parties themselves have not yet agreed upon.

Lawyers can identify risks, explain legal obligations and ensure the agreement accurately reflects the transaction. However, they cannot make commercial decisions on behalf of the vendor or purchaser. The most successful transactions are those where the parties have already agreed the key details before putting pen to paper.

The Agreement Does More Than Record the Purchase Price

The purchase price is only one part of a business sale. The agreement also requires the parties to consider a range of other important matters, including:

• What assets are included in the sale.
• How stock is to be treated, valued and adjusted.
• Should there be covenantors and/or guarantors and if so, who.
• Is a deposit payable.
• Whether employees will/must be transferred.
• Vendor training and handover obligations.
• Restraint of trade provisions.
• Is there a real estate agent involved or is the transaction a private deal.
• Finance and due diligence conditions.
• Assignment of leases and key contracts.
• Are there “trading names” to be considered.
• Do Alcohol or Food licences need to be addressed and what timeframes are involved.
• Have accountants reviewed the proposed transaction and advised.

Where these matters have not been properly discussed before signing, misunderstandings can quickly develop.

Common Areas Where Problems Arise

Stock Valuation

The parties should agree whether stock is included in the purchase price or valued separately. They should also consider how obsolete, damaged or slow-moving stock will be treated. Different expectations about stock can lead to disputes shortly before settlement.

Vendor Assistance

Purchasers often rely on the vendor’s knowledge and experience to assist with the transition of the business. It is important to discuss how much assistance will be provided, for how long, and whether any additional payments are required.

Employees

For many businesses, employees are one of the most valuable parts of the business. Purchasers should understand which employees are expected to remain with the business and how employee-related liabilities will be dealt with.

Premises and Lease Arrangements

If the business operates from leased premises, the lease can be fundamental to the value and continued operation of the business. Before signing, the purchaser should understand the remaining lease term, rights of renewal, rent reviews, permitted use, security requirements and any outstanding obligations. The parties should also confirm whether the landlord’s consent is required to assign the lease, what conditions may attach to that consent, and whether the proposed settlement date allows enough time to complete the assignment.

Accountant Involvement

The parties’ accountants should be involved early, rather than after the commercial terms have been settled. Accountants can advise on the allocation of the purchase price, GST treatment, depreciation recovery, stock valuation, working capital adjustments, financing and the tax consequences of the proposed structure. Addressing these matters before signing can prevent unexpected liabilities and avoid later negotiations that may affect the price or the viability of the transaction.

Alcohol and Food Licences

Where the business sells alcohol or prepares or sells food, the parties should identify the applicable licensing and registration requirements at an early stage and allow sufficient time before settlement to address them. Existing licences may not automatically transfer to the purchaser, and new applications, approvals, inspections or temporary arrangements may be required. Processing timeframes should be factored into the agreement and settlement timetable, as the purchaser may otherwise be unable to lawfully continue all aspects of the business immediately following settlement.

Restraint of Trade

Purchasers are usually buying not only the assets of a business but also its goodwill. The parties should therefore have a clear understanding of any restraint of trade provisions, including their duration and scope.

The Cost of Leaving Matters Unresolved

Leaving important issues to be negotiated after signing can create several problems:

• Increased legal costs.
• Delays in reaching settlement.
• Frustration between the parties.
• Uncertainty about what has actually been agreed.
• In some cases, the collapse of the transaction altogether.

In our experience, many of these issues can be avoided by investing a little more time upfront before the agreement is signed.

A Little More Time Upfront Can Save a Lot of Trouble Later

When a business sale encounters difficulties, the cause is often not an unexpected legal issue. More commonly, it is because the vendor and purchaser had different assumptions about important aspects of the transaction that were never properly discussed before signing.

The REINZ/ADLS Agreement provides an excellent framework for documenting a transaction, but it works best when the key commercial terms have already been agreed with good advice along the way. The more clarity there is before the agreement is signed, the less likely the parties are to face costly disputes, delays or last-minute negotiations.

Taking the time to have those discussions at the outset can help ensure everyone is working towards the same outcome and that the agreement accurately reflects the deal that was intended.

How Harkness Henry Can Help

At Harkness Henry Specialist Lawyers, we have extensive experience acting for both vendors and purchasers in business sale and purchase transactions throughout New Zealand.

Whether you are buying your first business, selling a business you have spent years building, or acquiring an established enterprise as part of a growth strategy, we can provide practical, commercially focused advice from the early negotiation stage through to settlement.

Our goal is not simply to prepare documents. We work with our clients to identify potential issues early, ensure key commercial terms are properly documented, and help achieve a smooth and successful transaction.

If you are considering buying or selling a business, we welcome you to contact our team to discuss your proposed transaction. Early advice can often make the process simpler, more efficient, and significantly less stressful.

This article is intended as general information only and does not constitute legal advice. Specific legal advice should be obtained for your particular business transaction.  This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.