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How to Limit Legal Risks When Buying a Business

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A business purchase is a significant investment. As such, you probably want it to go smoothly and without any legal disputes, penalties or setbacks. Nevertheless, buying a business entails many risks, from entering into new contracts to purchasing business assets. Therefore, it is essential to manage and mitigate these to avoid a bad purchase. This may be through legal documents, due diligence and assessing the legal health of the business. This article will outline how you can best mitigate your legal risks during a business purchase. 

Conduct Due Diligence 

Due diligence is the process of investigating a business’s affairs before a purchase. This will help you make an informed decision and become aware of any potential risks and liabilities. During the process, you can acquire help from your accountant and corporate lawyer to understand the material well. 

Commonly, during due diligence, you can review:

  • financial statements;
  • business contracts;
  • licences and permits;
  • property lease;
  • intellectual property (‘IP’); and
  • legal documents and litigation.

You should ensure to pay close attention to legal disputes, compliance concerns or ongoing legal actions. This may affect the company’s future value and operations. Additionally, any risks uncovered should be discussed with your seller during negotiations. 

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It is vital to confirm that the business has robust compliance with all relevant laws and regulations. To assess this, you can review permits, licences, certifications and the overall legal health of the business. Additionally, you should ensure that the company adheres to:

  • industry regulations, such as food safety laws;
  • privacy and data protection laws;
  • health and safety regulations; and
  • environmental requirements.

Environmental compliance can include issues such as:

  • contamination; 
  • ecological liabilities; or 
  • complying with environmental regulations. 

There may also be local tikanga to consider if resources nearby, such as land or water, are deemed tapu or under a tribal authority.

Non-compliance can result in legal penalties and fines. Likewise, it can damage a company’s reputation and future relations. Your corporate lawyer can guide you in assessing compliance and identifying high-risk areas. 

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Consider IP 

When purchasing a business, it is best to confirm whether all relevant IP can be transferred to you. This may include:

  • trade marks;
  • design rights;
  • patents; and
  • social media logins.

Ensure the seller has made preparations by applying to transfer IP rights with the IPONZ. Further, to clarify the scope of the IP ownership, an assignment agreement should be drafted. This legally binding document will transfer ownership to you. It can contain:

  • parties’ ownership statuses;
  • definitions of IP;
  • warranties and indemnities;
  • types of IP being assigned; and
  • confidentiality.

The agreement will need to be sent to IPONZ as evidence of the IP assignment. Other documentation can also include a sale and purchase agreement to confirm the assignment. 

Sale and Purchase Agreement (‘SPA’)

To finalise the terms and conditions of your purchase, it is best to draft an SPA. This is key in minimising legal risks and should reflect your discussions during negotiations. Your lawyer can ensure the agreement is drafted in your best interests. Further, by outlining the rights and obligations of both parties, you can reduce the risk of future legal disputes. 

When reviewing your SPA, ensure to pay attention to:

  • representations and warranties;
  • indemnification;
  • dispute resolution;
  • limitation of liabilities; and
  • settlement process.

You can also draft clauses that will deal with contingencies or unfavourable circumstances. This may include:

  • breach of contract;
  • IP disputes; and
  • undisclosed liabilities after the purchase.

Restraint of Trade 

To protect the health of your business in the future, your sale and purchase agreement can include a restraint of trade clause for the seller. This can prevent the seller from utilising sensitive information about client relationships to compete against you in the market. Your clause should be limited to a geographical area and only last for a specific period. 

When judging whether you can legally enforce the clause, you should consider:

  • your business interest;
  • the reasonableness of the restraint;
  • any geographical or population limits; and
  • the seller’s position in the company.

Key Takeaways

Buying a business can be risky, and it is vital to mitigate these. Firstly, you should ensure to conduct due diligence and assess the legal compliance of the business. Secondly, you should confirm that the business can transfer the IP ownership. Thirdly, you should begin drafting a sale and purchase agreement and consider a restraint of trade clause. 

If you need help buying a business, our experienced business sale lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.

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