United States Legal Documents


Selling your business

This range of US business sales agreements deal with the sale of a range of business types or a specific assest. Stock purchase agreements and due diligence checklists are included.

17

How to buy a business

Introduction

For those wanting to go into business on their own, buying an existing business can both ease the learning curve involved and also provide you with some established goodwill – that is, the immediate ability to generate turnover.

This information sheet outlines some of the factors you will need to consider in buying a business.

The sale and purchase agreement

You should thoroughly review the proposed sale and purchase agreement and seek a lawyer's advice as to its effect.

The Real Estate Institute of New Zealand and the Auckland District Law Society have approved a printed form of agreement, and it is common for this form to be used for the sale of small and medium-sized businesses.

The purchase price

Goodwill, plant, fittings and fixtures, and stock together usually make up the purchase price. It is important that the purchase price is broken down into these components, with a value attributed to each one, in the agreement for the sale of the business.

Turnover

Are the seller's turnover figures correct? Can the seller substantiate them? Ask for detailed financial statements of the performance of the business and have them assessed by an accountant.

It is common for sale and purchase agreements to include a warranty by the seller that the turnover details in the agreement correctly state the average weekly turnover (including GST) of the business during a certain period. (If the seller breaches a warranty, you can sue him or her for damages.)

If a turnover figure has been affected by a one-off increase in business activity, it may be misrepresentation if the seller fails to bring this to your attention.

Goodwill

Is the goodwill worth what the seller is asking for it? Are there any patents, trademarks or other intellectual property included in the goodwill, and if so, are they dependent on any licences?

Note that goodwill is generally capital, and therefore is neither deductible nor depreciable for tax purposes.

The premises

Are the premises adequate? Are they properly authorised for the operations of the business or for any changes you intend to make to the business?

It may be advisable to check that the status of the property under the RESOURCE MANAGEMENT ACT 1991 is appropriate for your intended use of it, especially if you plan to modify the business so that the use of the property is different from that of the seller.

If the premises are leased, the lease is part of the goodwill. The consent of the landlord to the lease being assigned to you will need to be obtained, but the landlord cannot unreasonably withhold consent. The sale agreement form approved by the Real Estate Institute and the Auckland Law Society provides that it is the seller's responsibility to seek the landlord's consent.

Plant

What plant is included? "Plant" normally includes all items of machinery, implements, vehicles, furniture, fittings and fixtures

The sale and purchase agreement should list in detail every item of plant that is being bought. This is usually done in a separate schedule to the agreement.

Is the plant owned, leased or under hire purchase? The seller can sell the plant only if the seller owns it at the date of the agreement to sell the business. If the plant to be transferred to you is leased or on hire purchase, the agreement to sell the business may specifically provide for those arrangements to be continued with you the buyer.

If the business premises are leased, it is important to ensure that chattels and fixtures belonging to the landlord are not included in the list of plant items in the sale agreement.

Whereas the buyer will want a high value on plant and equipment for a greater depreciation claim, the seller will want to sell it at no more than its book value to avoid tax on depreciation recovered on the sale.

The stock

Consider the nature, quality and approximate value of the stock. How is it to be valued? Normally, an estimated value is inserted in the agreement and the actual value as at the close of business on the possession date is determined by a physical stocktake.

Is any of the stock already secured and subject to a Romalpa clause? This is a clause preventing title to the stock passing until it's fully paid for: see related article How to be aware of your rights under a "Romalpa" clause ("reservation of title" clause).

Contracts relating to the business

What are the business's existing contracts, such as contracts to buy goods, contracts to supply goods, and service contracts?

You will need to be satisfied that these contracts will pass to you with terms and conditions comparable to those that applied to the seller. It may therefore be advisable for the sale agreement to provide that the seller will introduce you to the business's suppliers and customers, and that the seller will disclose all details of his or her past dealings with them and attempt to ensure that the relationships will continue with you.

You should consider what warranties exist for goods and services supplied to the business.

Liabilities

Are the assets included in the sale being acquired free of encumbrances? This means that the assets are the seller's property, that no money is owed on any assets to third parties, and that the seller is able to pass title in the assets to the buyer. Agreements for sale of a business commonly include a warranty by the seller to this effect.

You should also consider including a warranty by the seller that he or she will pay and discharge all business debts and liabilities by the possession date.

What are the seller's obligations for the supply of goods and services? What indemnities has the seller given or will need to be given by you?

Employees

You will need to see a full list of staff and details of the employment contracts.

It is usual for the seller of a business to warrant to the buyer that the seller will pay all outstanding PAYE tax and any other payments required by the Inland Revenue Department, and that the seller will fully pay every employee up to the settlement date, plus holiday pay, along with any other entitlements owing to them.

When a business is sold, the employees become technically redundant: employment contracts cannot be transferred and so their employment with the seller ends.

Access to business records

It may not be practical for you to be given full access (called "due diligence") to the seller's business records, because of, for example, the seller's confidentiality concerns. Instead, sale agreements commonly provide for an alternative form of access (called "limited due diligence") whereby the seller discloses information to you in a memorandum and the accuracy of this information is warranted by the seller in the sale agreement. In this case, you the buyer will sign a confidentiality agreement.

Access to the business before settlement

Will you need access to the business before settlement to obtain valuations, to make alterations or to be introduced to customers?

Risk and insurance

The sale agreement should specify when the risk in the assets passes from the seller to you. Normally this is on the settlement date.

What types of insurance will you require? Types to consider are public liability insurance, insurance of the plant, and (less commonly) business interruption insurance.

Apportionment of costs

What costs will have to be apportioned between you and the seller at settlement (for example, rates, rent and licence fees)?

Restraint of trade

The purchase price of a business includes goodwill, and therefore the buyer is entitled to restrain the seller from competing against the buyer in a similar type of business for a certain period (usually two years) and within a certain radius from the premises.

However, the courts won't enforce such a restriction if the time period and the geographical area are unreasonable to the seller.

Conditions of the sale

Is the sale subject to finance, consent of the landlord, a satisfactory LIM (Land Information Memorandum), and satisfactory accounts for the business?

Franchises, licences and consents

Are there any franchise or license agreements that need to be assigned?

If the business requires a licence to operate, or some other governmental consent, the agreement should contain a warranty by the seller to the effect that the licence or consent will be kept current up to the possession date and that the seller will facilitate its transfer to the buyer, if transfers are permissible.

Operating the business before and after the sale

It is usual for the agreement to include a warranty that the seller will properly carry on the business as a going concern and maintain its turnover and preserve its goodwill.

It is also common for the agreement to include a requirement that the seller, or some other experienced person that the parties agree on, helps the buyer for a period so that the buyer can get the benefit of the seller's knowledge and experience.

Registering for GST before the sale

It is desirable that the buyer registers for GST so that the transaction can be zero-rated for GST purposes. If this is done, no GST will be payable on the purchase price. (See How to work out whether you must register for GST).

Whether to form a company to be the buyer

You should consider whether it is best to buy the business in your own name or instead to form a limited-liability company to be the entity buying the business (see How to form a company).

Cautionary notes
  • You should consult a lawyer and accountant on all aspects of buying a business. They can help you decide if the purchase is worthwhile, and ensure that it takes place with minimal difficulties.
  • Buying a business is an extremely important decision and means committing your own cash resources or borrowing money from a bank to complete the purchase, or both. Borrowing money for the transaction could mean having to increase your mortgage over your home or other property.

How to buy a restaurant

What type of business arrangement should I adopt?

Once you have made the decision to buy a restaurant and have arranged the necessary finance, you should also consider the type of business arrangement that is best for your situation. It may be that you are to be in partnership with other owners, or a sole proprietor or a company. Different arrangements carry with them different types of liability (see realted article How to structure your business), and you should consider carefully the liability with which you are personally comfortable.

Obtaining a health licence

One of the most important considerations in starting a restaurant business is obtaining a health licence. This is a requirement before any food may be sold from the premises. Licences are issued and administered by your local council. They must be renewed each year.

When you apply for a licence, the council will carry out an initial inspection of the restaurant premises to ensure that they comply with health, hygiene and safety standards. Inspections are undertaken by the council periodically after the initial inspection at their discretion.

Licences can be transferred to new owners of the business for a nominal fee.

Liquor licences

You will also be required to obtain a liquor licence if you are intending that alcohol will be sold or consumed on the premises: see How to obtain an "on-licence" to sell liquor.

Ongoing council inspections

If the council have any reason to suspect the premises may be breaching any of the relevant standards (for example, if there has been a complaint from a member of the public), health inspectors will keep a watchful eye on your business, and this would undoubtedly involve more frequent inspections.

Paying for "goodwill"

The purchase price for the restaurant business will generally include a component for "goodwill" – that is, the restaurant's reputation and clientele. You should obtain legal and accounting advice as to what would be a reasonable figure to pay for the goodwill attaching to the business.

Existing staff

The reputation and goodwill that attaches to a particular restaurant can be heavily dependent on the restaurant's chef(s). It is therefore strongly recommended that before buying a restaurant you ascertain whether or not the chef(s) intend to stay on with new owners.

Franchise restaurants

It may be that the restaurant you are contemplating buying is part of a chain or franchise. If so, there are specific considerations that you should take into account: see How to buy a franchise.

Cautionary notes
  • The issuing, renewing and transferring of health and liquor licences are all subject to a fee. This may vary from council to council.
  • It would be wise before buying the business to contact your local council and request the case history on the restaurant concerned.
  • There are a number of potential pitfalls involved in buying a business, ranging from licensing to staffing issues. It is therefore strongly recommended that you seek legal and accounting advice before buying a restaurant.

How to buy and sell shares in a private company

Introduction

The method of buying and selling shares in a company will depend on a number of factors. In particular it depends on whether the company is a publicly listed company.

If the company is publicly listed, its shares will be listed on the stock exchange and different rules apply to the sale and purchase of the shares. If the company is a private company, the rules about buying and selling shares are set out in the company's constitution and in the COMPANIES ACT 1993.

Protection of existing shareholders through "pre-emption" rights

It is quite usual for a company's constitution to contain "pre-emption" rights for existing shareholders, requiring existing shares to first be offered to the existing shareholders before they can be offered to non-shareholders. The purpose is to maintain the ranking of existing shareholders so that their voting and distribution rights are not diminished.

The COMPANIES ACT 1993 also provides for existing shareholders to have pre-emptive rights over the issuing of new shares by the company. The Act states that any new shares must first be offered to existing shareholders on a proportional basis so that the shareholders' existing voting and distribution rights are maintained. The offer to the existing shareholders must remain open for a reasonable time.

However, it is open for the company's constitution to negate, limit or modify this statutory pre-emptive right over new shares.

Company may buy its own shares in certain circumstances

A company is permitted to buy its own shares if certain requirements are met. Aside from some special situations (such as where dissenting shareholders exercise "minority buy-out" rights), the COMPANIES ACT 1993 gives company boards a general power to make offers to existing shareholders to buy their shares, provided the following requirements are met.

The board of directors cannot make an offer to buy shares unless this is permitted by the company's constitution. If so, the board may make an offer to all shareholders to buy a proportion of their shares, in such a way that the acquisition would maintain each shareholder's relative voting and distribution rights. Alternatively, the board may make a special offer to one or more shareholders to acquire their shares, provided all shareholders have consented to this or the offer is permitted under the constitution.

The board may not offer to buy shares unless it has passed a resolution stating:

  • that acquiring the shares is in the company's best interests
  • that the terms of the offer and the consideration for the shares are fair and reasonable to the company
  • that the board is not aware of any relevant information that has been withheld from shareholders

Registration of share transfer in the share register

When a valid transfer of shares has taken place, the company is obliged to register the transfer in its share register. The entry of the buyer's name is evidence of that person's legal title. For information on the share register, see related article How to maintain a company share register.

Cautionary notes
  • It is critical that any sale meets the requirements of both the company's constitution and the COMPANIES ACT 1993. To ensure that this is done, it is strongly recommended that you seek legal advice from a company law specialist.
  • Your legal adviser will also advise you as to the terms of the agreement for the sale and purchase of the shares. If you are buying shares, your lawyer will advise you as to:
    • ensuring before the sale that the shares are not mortgaged and that they are fully paid for, and
    • what rights and obligations are attached to the ownership of the shares
  • The price at which the shares will be sold is obviously an important consideration, and you should obtain advice from a lawyer and accountant on this issue. They can assist you in ensuring that the correct procedure is followed for determining the price and that the price is appropriate.

NZ$19.95

This Agreement and Plan for Reorganization for IRC Type C Reorganization is used when a purchaser acquires assets of a seller's business in exchange for purchaser's voting common stock.

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This Agreement to Purchase Specific Assets contains all the terms you need when selling particular assets.

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NZ$12.95

This Asset Purchase Agreement is between a purchaser and a seller of a business and its assets.

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NZ$9.95

This Contract for Sale of Professional Practice is for use by a purchaser who desires to buy an established practice.

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This Due Diligence Checklist is a valuable tool for the buyer of a business. This checklist contains relevant information which should be sought and review of all assets owned or leased by the business.

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NZ$9.95

This Finder's Fee Agreement for Acquisition is between a finder and a company who desires to hire the individual to find a buyer to acquire all or a portion of the company's business and assets.

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This Guarantee of Obligations Under Asset Purchase Agreement is between a vendor, purchaser and guarantor of goods.

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Documents used when making an offer to purchase a business or certain assets or shares of a business.

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This Plan and Agreement of Merger sets out all terms and conditions which must be met before two companies can merge.

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Agreement between a seller and a buyer who agrees to purchase certain products from the seller.

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This form should be used when one party is selling an entire business to another party. This form is set up for use in the sale of a sole proprietorship to an individual.

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This form should be used when one party is purchasing only certain business assets from another party. This form is set up for use in the sale of sole proprietorship assets to an individual.

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NZ$5.99

A Stock Power is a document which transfers ownership of company stock from one party to another. Usually a third party completes the transfer of stock by means of a power of attorney.

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A stock purchase agreement is an agreement wherein the owner of shares of stock agrees to sell the stock to a purchaser.

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