Navigating the process of purchasing a business

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In many cases, it makes sense to buy an existing business. You skip the risky start-up phase and gain an existing brand, client base, staff, and stock.

Once you have found the business you’d like to purchase and have researched all aspects, it’s time to register formal interest and start due diligence — the process of understanding what assets, liabilities and commercial potential a business has.

Paula Lines, Commercial Lawyer at The Law Shop

At that time, it is important to appoint an adviser who can assist you further. Professional advice is important to make sure all bases are covered, but getting a lawyer and accountant on board also improves your credibility as a buyer.

“A lawyer’s role in the process of acquiring a business is more than preparing a Sales and Purchase Agreement or reviewing a lease document, and incorporating a new entity with the Companies Office,” says Paula Lines from The Law Shop.

“Our team can assist in investigating all the important components of the process, as part of the due diligence process. We’ll make sure you understand the risks involved, and alongside you, we’ll look at everything,’” she explains.

When you buy a business that has stock, you’ll usually see a “stock adjustment percentage” in the Agreement for Sale and Purchase. This takes into account the fact that stock fluctuates day to day, maybe hour by hour, in the business.

“What you have on hand today could be quite different from what is available tomorrow. From a buyers perspective, you want to know that you are going to have enough stock to trade immediately after settlement and that it is all good, saleable stock, not stuff that has expired or is obsolete,” Paula says.

“From a seller’s perspective, you want to get reimbursed for all the stock you have paid for prior to settlement. The stock adjustment percentage takes some of the risks out for both buyer and seller,” she explains.

Paula clarifies that you agree a price for the stock – whatever the seller would normally have on hand – and you agree on a percentage for it to be adjusted by. Say you’ve got $10,000 of stock and a SAP of 10%. Either the day before settlement after the business closes or that morning, the parties do a joint stocktake and come up with a figure.

“If it’s between $9,000 and $11,000, the buyer will pay the actual amount. If it’s more than $11,000, the buyer can either buy it all and pay the actual amount or pay $11,000 and choose what the seller takes away. If it’s less than $9,000, the buyer pays the actual amount but the vendor may be in breach of the warranty to keep sufficient stock,” she says.

The team at The Law Shop has decades of experience with handling business transactions and negotiation strategies and will make sure that all legal issues are brought to your attention and your interests are protected. Contact their Rotorua or Tauranga office today or visit www.thelawshop.co.nz to book in a confidential conversation about your business purchase.

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