Want to be your own boss but lack experience? Five key steps to buying a business

Many readers will be familiar with the popular television drama Nothing But Thirty, currently screening. After joining an elite wives’ circle, the main character, Gu Jia, believes she has found powerful connections who can easily open doors to business opportunities. But there are no shortcuts to success. Only after completing a purchase does she discover that the seller, Mrs Li, has tricked her into buying an underperforming tea plantation business, putting a substantial sum of money at risk.

For many newcomers to business, buying a business involves considerable know-how. Today, we will discuss the five key steps to buying a business in New Zealand and related matters.

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Step one Preliminary due diligence

The first task, of course, is to find a business opportunity that appeals to you. Traditional ways to do this include introductions from friends, recommendations from business brokers, or contacting the franchisor of a business you are interested in directly for information.

Whichever route you take, during this process you may be asked to sign a confidentiality agreement. This agreement is intended to ensure that the business information supplied by the seller is used only by you and your advisers—your accountant and/or lawyer—and is not disclosed to anyone else.

This preliminary business information includes basic financial details, key assets and lease information, giving you a general understanding of how the business operates. At this stage, we recommend consulting a professional accountant to assess a reasonable value for the business using this information. You can also investigate typical rates of return in the industry to ensure your offer falls within a reasonable range.

Step two Involve a lawyer in preparing the agreement

Once you have selected a business and obtained an initial valuation, you need a lawyer to help review and safeguard your interests in the purchase offer agreement.

In New Zealand, the offer agreement is generally drafted by your business broker. The most commonly used template is the Agreement for Sale and Purchase of a Business developed by the Auckland District Law Society Inc.

Buyers should be aware that signing this agreement involves important considerations that deserve careful attention. This is because although it is an offer agreement, once the other party accepts it, it becomes your final sale and purchase agreement. The parties will not sign a separate new agreement. It is therefore essential to have a professional review the agreement in light of the nature of the business. Lawyers reviewing these agreements will usually add further conditions. Some may concern employee arrangements; others may require the seller to provide business contracts or franchise agreements, or address ownership of the business name. For certain businesses, your lawyer can also draft special provisions, such as strict restraint of trade clauses, to better protect your interests.

Step three Confirming the agreement’s conditions

After signing the agreement, the buyer and seller move to the next stage: confirming that its conditions have been met. Many people ask what conditions commonly appear in a sale and purchase agreement. The standard Law Society agreement includes the following conditions that buyers may select:

• Finance condition: confirming that the buyer has sufficient funds to complete settlement;
• Lease condition: confirming that the landlord agrees to continue leasing the premises;
• Due diligence.

Buyers can also add other conditions to suit their circumstances. Common examples include requiring certain employees to agree to sign employment agreements with the buyer, or obtaining the franchisor’s written consent for a franchise business. Additional conditions vary according to the type of business. If any condition included in the agreement is not met, the buyer has the right to have their lawyer issue a letter cancelling the agreement.  

Let us now focus on due diligence: for buyers, due diligence is a particularly important stage. We will explore due diligence techniques in greater detail in a separate article.

Both the buyer’s own investigations and those of their professional team are important during due diligence. At this stage, you and your advisers can examine all information about the business before deciding whether you really want to buy it. Some information will be financial, requiring your accountant to examine the business’s financial position in detail. Your lawyer may need to review important agreements already entered into by the owner, such as leases, supplier agreements, franchise agreements and licensing agreements. As the buyer, you also need to investigate and confirm the surrounding environment, competition and industry changes. Sometimes this involves speaking with key suppliers and other relevant people to ensure that every aspect of the business meets your expectations. Doing this work thoroughly can help reduce the likelihood of unexpected problems arising when you operate the business.  

Step four Confirming the agreement is unconditional

Once all conditions in the agreement have been satisfied, the buyer’s lawyer will declare it ‘unconditional’.

This means you must proceed with the purchase under the agreement. If you fail to complete it, you may be required to compensate the seller for their losses.

Once the agreement is confirmed as unconditional, the buyer’s lawyer is responsible for preparing or arranging the following:

• A deed of assignment of lease, if applicable, and signatures from the relevant parties;
• Employment agreements, if required;
• Settlement documents;
• Signing of loan documents, if the purchase is funded by a bank loan;
• Checks on the business assets you are buying to ensure they are not subject to third-party security interests. The Personal Property Securities Register can be searched for any registered security interests.

Step five Settlement day

Before settlement day, the buyer and seller will conduct a stocktake together, counting all usable stock to confirm the value of the stock being purchased. The lawyer will then check that all other requirements have been met. For example, all parties must have signed the deed of assignment of lease, employees must have signed employment agreements, suppliers must have signed any deeds of covenant, payment terminals must have been transferred to the buyer’s account, and original lease documents must be available.

On settlement day, the buyer’s lawyer transfers the purchase funds to the seller, who hands over the business’s keys to the buyer, marking completion of the purchase. Any other settlement requirements relating to the business purchase are completed at the same time.

This outlines the process of buying a business in New Zealand. We hope it helps clarify the five key steps. Buying a business is a major decision involving a complex process. But if you work through each step, thoroughly understand the business inside and out, manage risks with the help of professionals such as lawyers and accountants, and only then confirm the agreement as unconditional, you will certainly be able to buy a suitable business. What you must avoid is placing excessive trust in others and impulsively signing an agreement, as Gu Jia does in Nothing But Thirty.

About the authors:

Joy Yuan is a lawyer admitted to the High Court of New Zealand and a principal at Turner Hopkins. She holds degrees in law and management, and an MBA specialising in entrepreneurship from Babson College in Boston. Her expertise covers commercial law, including company structures, shareholder agreements and trust establishment, as well as property law, including subdivisions and property transactions.

Elaine Li is a legal executive in Turner Hopkins’ commercial and property department. Her work covers commercial lending, business sales and purchases, changes in shareholding, commercial leases, sales and purchases of houses, apartments and commercial properties, subdivisions, and changes to easement and title registrations. She also assists the firm’s partners with employment matters and commercial disputes.