Buying A Business In An Asset Sale

Buying a business is an exciting process, but it’s crucial to understand the entire process. With contracts, leases, and employees involved, you want to ensure everything is handled correctly.

In this article, we’ll guide you through the legal process of Buying A Business’ Assets.

Acquiring a business’ assets is advantageous as you gain access to an established brand name, goodwill, existing customer base, suppliers, and employees.

If you are purchasing a business, it’s vital to ensure that all aspects are in order before you pay the purchase price. The process can be complex, and seeking legal advice is recommended to ensure you secure a favourable deal and that all legalities are properly addressed.

What To Do Before Signing The Contract

Let’s explore the essential steps you should take before signing any documents.

Undertake Due Diligence

Before buying a business, conducting a thorough background check is essential to know exactly what you’re getting into.

This involves performing the necessary due diligence on the business you’re purchasing. Does the business truly own the assets you’re buying? Are there any outstanding debts on those assets that you might inherit?

It’s best to conduct due diligence as early as possible. You can’t hold the seller accountable later if you didn’t verify these details yourself.

When buying a business and its assets, it’s wise to do your research before committing to the purchase.

You can read more about the due diligence process here.

Have A Lawyer Review Your Contract

When buying a business, you’ll typically receive a contract of sale, often referred to as a Business Sale Agreement.

This contract is usually prepared by the vendor or the seller of the business. Before you sign it, ensure that a lawyer reviews the Business Sale Agreement so you fully understand its implications.

The buyer and seller often have competing objectives when considering the Business Sale Agreement.

The seller will likely aim to minimise their risk and avoid making any guarantees, while the buyer may want a non-competition clause to prevent the seller from competing with them post-sale.

These terms are typically subject to negotiation, with the final agreement often being a compromise between the parties’ positions and risk tolerances.

That’s why it’s crucial to have an experienced lawyer identify any potential risks associated with purchasing the business’ assets. You don’t want to agree to terms you didn’t intend to accept post-settlement.

Your lawyer will also explain other important aspects of the process, ensuring you know what you’re committing to.

A Business Sale Agreement typically includes standard terms regarding payment transfer, trade restraints, and employee transfers.

However, the seller might also include ‘special conditions’ in the Business Sale Agreement, outlining specific terms relevant to your transaction. For instance, some transactions may involve additional terms regarding training to facilitate a smooth transition.

Transfer Leases

If you’re acquiring all the assets of a business, you’ll likely need to take over the existing lease agreement. This process is known as a ‘transfer’ of the commercial or retail lease.

Before agreeing to the lease transfer, ensure you understand the lease terms. Consider:

• Whether you can afford the lease payments
• The duration of the lease commitment
• Any other lease terms you should be aware of

It’s important to have a lawyer review the lease before you sign it, as renegotiating post-signature can be difficult without breaching the contract.

After a lawyer reviews your commercial lease, you’ll be better positioned to decide if you’re comfortable with the transfer. In some cases, you may also negotiate a new lease with the landlord.

Conduct Searches

Beyond contracts and leases, a lawyer will assist you in ensuring everything is in order before the business sale is finalised.

These are generally called ‘searches’, which include:

• Company and business name search: You can conduct an ‘Organisations and Business Names’ search on the New Zealand Companies Office website.
• Trade marks search: If you are purchasing any trade marks, ensure that the ownership is transferred to your new business via IPONZ.
• PPSR search: This is to confirm that there are no security interests over any assets you are purchasing via the New Zealand PPSR.
• Continuing agreements: Verify whether the seller has any ongoing contracts with key stakeholders that need to be transferred to your business.

Transferring Employees

When purchasing a business, consider whether you wish to retain the current employees.

Many buyers prefer to keep the existing staff to avoid the need for new training. If the business has a strong community reputation, significant changes in management could impact operations.

To transfer employees, the seller must formally end their employment agreements. The Business Sale Agreement may require the seller to provide written notice of this termination before settlement.

Typically, business sale agreements stipulate that the buyer offers employment to the staff under similar terms to their current contracts.

Subsequently, you’ll need to draft new Employment Agreements for these employees. Additionally, you’ll need to determine if any employment standards apply to your employees.

Learn more about transferring employees here.

How To Prepare For Settlement

Once you’ve signed the contract and are awaiting the settlement date, there are several tasks to complete.

You may require a Deed of Assignment and Variation of Lease if a commercial lease is involved. This document assigns the lease from the vendor to the purchaser, with the tenant agreeing to assume the lease’s rights and obligations.

As the purchaser, you must also fulfil any other obligations outlined in the Business Sale Agreement, including any special conditions.

During this period, it’s also crucial to seek advice regarding any security interests affecting the assets and ensure they are removed from the PPSR at settlement.

The settlement date should be scheduled, and the buyer must consider adjustments for stock and employee entitlements (if transferred).

What To Do At Settlement

Settlement is when legal ownership transfers from the seller to the buyer. It’s typically a straightforward process.

On settlement day, expect the following:

• Meet at the agreed location, which could be the business premises, online, or at the solicitor’s office.
• The buyer pays the remaining purchase price, adjusted for variables such as employee wages, rent, stock, etc.

What To Do After Settlement

Post-settlement, attend to any remaining obligations under the Business Sale Agreement.

This includes lodging applications for the transfer of the business name, licences, permits, trade marks, security interests, and more.

There may also be a handover period where the seller completes specific tasks under the Agreement.

The handover period could involve:

• Assisting the buyer with contracts with third parties
• Introducing the buyer to employees if transferred
• Providing training to the buyer
• Handing over keys, security, system access, etc.
• Notifying utilities, banks, associations, etc.

What If Something Goes Wrong?

As a buyer, various issues can arise if due diligence is not thorough—from misrepresented business profits to undisclosed disputes with suppliers or employees.

A seller provides numerous representations and warranties when selling their business. If liabilities are identified during due diligence, an indemnification clause can be included in the contract, holding the seller financially responsible for those liabilities.

These clauses can also protect the buyer from misrepresentations about the business. A well-drafted contract is essential in these situations.

Protections against misleading and deceptive conduct under the Fair Trading Act 1986 can also apply and protect buyers in certain scenarios.

Need Help?

Navigating this process can be complex and overwhelming. It’s important to have a lawyer review or draft your Business Sale Agreement and/or Commercial Lease.

If issues arise, they can have long-term consequences. It’s also crucial to conduct due diligence before purchasing a business’ assets to avoid potential liabilities.

Sprintlaw has assisted numerous clients with buying and selling businesses. As a fully online law firm, we can support you throughout the entire process, ensuring it’s as smooth as possible.

If you’re looking to buy a business, contact us at [email protected] or on 0800 002 184 for a free, no-obligations chat.

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