The Sale and Purchase of a Small to Medium Business

Buying a business can be stressful – mainly, because it’s a complicated transaction that requires a lot of attention to detail. It’s an exchange that requires focus and immense trust on the purchaser’s part. With the many moving parts and associated risks, it’s always wise to have a formal agreement in place. 

In the most common Agreement for Sale and Purchase of a Business, published by the Auckland District Law Society, the vendor warrants to the purchaser a number of things regarding:

• The current affairs and performance of the business
• How the business will be run by the vendor up until the settlement date
• How the business assets will be transferred to the purchaser on settlement.

Whether you are the purchaser or the vendor, these warranties are an important part of the bargain made under the agreement. Breaches of the agreed warranties can result in serious legal and financial consequences.

Statutory/Legal Demands

Understandably, a purchaser doesn’t want to take on any unexpected legal issues that the vendor knew about but didn’t disclose before signing the agreement. To give the purchaser comfort, the vendor warrants that when signing the agreement, they haven’t received any notices or demands, and don’t know about, any outstanding requirements from a government body, their landlord, or any other party, that  might negatively affect the business. To protect the purchaser further, the vendor must disclose promptly if any of these things happen between the signing of the agreement and the settlement. These unexpected issues could include compliance with bylaws, the Resource Management Act, the Health and Safety at Work Act or breaches of the lease. Furthermore, the vendor warrants that they will discharge any current liabilities and reimburse against future liabilities which were incurred before settlement.

Vendor’s Operation of The Business

From the time when the agreement is signed to the settlement date, the vendor has obligations to the purchaser as they continue to run the business. The vendor warrants to run business as usual. This includes preserving the business’ capital, goodwill, and refraining from taking on any new obligations and/or liabilities outside the usual course of business without the purchaser’s consent. 

Vendor’s Period of Assistance

Often, the vendor agrees to assist the purchaser to take the reins of the business after settlement. In these cases, the vendor – or a suitably experienced representative – must make themselves available to assist the purchaser over the agreed period post-settlement. The vendor must do things like introducing the purchaser to key customers, explain processes, discuss staff management, the ordering of goods and services, delivery issues and so forth.

Turnover Warranty

When deciding whether to buy a business, the purchaser has certain expectations about how much money the business will earn them. This is critical to their decision whether to purchase the business and how much to pay for it.  They rely heavily on the vendor to state correctly what the business’ annual turnover is.  So, the vendor will typically give a turnover warranty, disclosing what the business earned over a certain period – normally, the last financial year, and the trading period since then. If the turnover warranty is found to be fraudulent, the purchaser can sue the vendor for misrepresentation. However, the vendor does not warrant the turnover the business will continue to make after the sale. That may vary due to many factors outside the vendor’s control, such as market conditions and the purchaser’s management of the business.

Handover

Finally, the vendor warrants that they will transfer all of the business assets and stock in the same condition as they were during the due diligence process. The vendor also agrees to discharge all business debts and outgoings up to the day of settlement. 

Whether you’re selling a business or buying one, you’re going to need an experienced commercial law solicitor to oversee the exchange. To ensure the successful sale or purchase of a business, get in touch with Carlile Dowling at 06 835 7394.