Whether you have been looking to sell your business for awhile and a great offer finally comes through, or you receive an offer out of the blue that is too tempting to turn down, it is important to remember to check off and assess a number of matters in the context of the offer in order to protect yourself from future legal or financial claims.
Before you sail off into the sunset with the purchase price in your back pocket, ensure your liabilities are cleared and you are not at risk (any more than is reasonable) of claims from the purchaser or another third party. Below is a list of key matters that you need to address in the sale documentation:
- Contracts: If you are selling your business, you will no longer have the assets (or people) to perform the contracts you have entered into. If these contracts are not properly terminated or transferred to the purchaser, then you could find yourself in breach of your obligations to the counterparty. It is therefore important to identify your existing contractual obligations and take steps to transfer the contracts to the purchaser (usually requiring the consent of the contractual counterparty) or ensure you can terminate the arrangements in a timely manner and without liability.
- Employees: A purchaser may agree to take on your employees as part of the sale, but this may not of itself alleviate your potential liability for redundancy or termination depending on the process proposed. Generally, you should seek for the purchaser to agree to offer the employees employment from settlement on substantially similar terms to their existing terms. This will give you the best chance of not finding yourself liable to pay redundancy compensation, however it will ultimately depend on the terms of your employment agreements. Remember that employees need to agree to transfer to the purchaser, and if they don’t, it is your responsibility to ensure their employment is properly terminated. You will also need to either pay (or arrange for the purchaser to pay) all outstanding entitlements such as accrued leave upon the transfer of the business. There also may need to be special consideration for those employees who are considered “vulnerable” pursuant to the Employment Relations Act 2000.
- Leases: You should ensure that the purchaser and landlord both agree to the transfer of your existing business leases. If this is not agreed, then you could find yourself liable under the lease in respect of the remainder of its term. It is important to note that, unless you agree an express term to extinguish your liability, then under the standard ADLS lease assignment, you will remain liable to the landlord in the event the purchaser defaults upon the terms of the assigned lease (and although you may get an indemnity from the purchaser, this will not be valuable if they have no funds to pay).
- Creditors: Suppliers and other parties that you owe money too, will usually remain your responsibility to pay. You should ensure that outgoings and incomings of the business are properly apportioned and any long term debts of the business are properly transferred to the purchaser (if that is agreed) or have been factored into your assessment of the financial benefit of the transaction. Similarly, you should clarify whether you or the purchaser will be entitled to the outstanding receivables of the business.
- Warranties: This is an important one. Warranties are essentially promises that you make to the purchaser as to the state of the business and its assets. Generally, if any of these “promises” turns out to be untrue (or in some cases, misleading), the purchaser will have a claim against you for its loss or damage. The scope of warranties is up for negotiation between the parties and will range hugely between transactions. You should ensure that you are comfortable that all warranties in the contract are in fact true, and you should take reasonable steps to verify that fact (for example by making enquiries of senior staff). You should also ensure that your liability for warranty claims is appropriately limited in the contract. It would be common to cap your liability to a figure (such as the purchase price) and in time (for example, the purchaser may not make any claims once a year has passed from settlement). Other common limitations include that you will not be liable if the matter has been disclosed to the purchaser prior to signing the agreement or has been rectified by the seller.
- Business transition: Often a purchaser will want for the seller to remain involved in the business for a period from settlement to assist with transition (and/or prior to settlement to help “hit the ground running”). Sellers should consider what they are prepared to offer in this regard (and whether the purchaser will be required to pay for hours spent) to ensure all parties are aligned in their expectations.
- Tax: Another key consideration is tax. You should speak to your accountant or tax advisor as to the tax implication of the sale and the purchase price monies received to ensure that you fully understand what you will be taking home in your back pocket as you send your business off on its new journey with a new owner.
A properly drafted and negotiated sale and purchase agreement will cover off these matters and ensure that you are protected as a seller to the extent negotiated with the other party. The last thing you want is to receive the purchase price in full, but then find yourself facing a claim to pay out some or all of those funds.
Please note that the comments above contemplate a situation where you are selling the business assets, but remaining owner of the company. If you are selling the shares of the company then different considerations apply.
Business Law team
If you need any assistance with the sale or purchase of your business, do not hesitate to get in touch with the Business Law team at Lane Neave.
Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace, Peter Orpin, Ellen Sewell, Matt Tolan, Carlo Wan, Kristina Sutherland, Jacob Nutt, Whitney Moore, Alex Stone, Ben Cooper, Lisa Catto
Also in this edition:
Business Law Newsletter:
Click here for other Corporate Law articles.