Turnkey businesses are becoming increasingly popular in New Zealand. You may be an existing business owner or someone looking to enter the business world. Either way, a turnkey business can provide you with many opportunities and benefits. However, before purchasing one, you need to understand the steps you should undertake. This article will outline what a turnkey business is and how to buy one.
What is a Turnkey Business?
A turnkey business is a business that already exists. This means that the manufacturing or supply chain and operations are in place, ready for you to take over and manage. In addition, products and services will be pre-defined, seeing as the turnkey has completed its initial startup stages. As a result, the primary purpose of a turnkey business is for you to buy it and keep it running smoothly with minimal effort.
In terms of business structure, a turnkey business is usually a franchise or an established company. Usually, franchises will include a building that suits that franchise’s specifications. You may also need to pay a franchise fee to the franchisor.
Signing the Confidentiality Agreement
Once you find a turnkey business suitable to your needs, you will want to know more about the business. Before investigating or asking for company information, the existing owner may request you to sign a non-disclosure agreement (NDA).
You will likely need to sign the NDA before proceeding with the process to guarantee the existing owner that you will not leak their confidential business information. Before signing, you should read the NDA carefully with a lawyer’s help to ensure that the terms are reasonable and will not hinder your future business ventures.
Standard NDA terms include:
- names of parties;
- meaning of confidentiality in this scenario;
- confidentiality inclusions;
- exceptions to confidentiality;
- people you can disclose information, such as your lawyers;
- period of enforceability; and
- consequences for breaching the agreement.
Conducting Due Diligence
When buying a turnkey business, you need to conduct due diligence. Due diligence means investigating a company to understand its:
- risks;
- opportunities; and
- value.
Without due diligence, you cannot make an informed decision and risk buying an unworthy business. As a result, for a successful due diligence process, you should investigate the following:
- accounts and financial information;
- agreements or contracts;
- operations;
- value of company assets;
- company’s level of legal compliance;
- employees; and
- intellectual property.
Taking your time with this step is essential, as comprehensive due diligence takes time. Therefore, it is in your best interests to start the due diligence process early to avoid losing the business to another buyer.
When conducting due diligence, you may encounter some issues or red flags. Consequently, you can ask the existing turnkey business owner for more clarification and how to mitigate such risks.
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Commercial Property Lease
The turnkey business likely includes a building or manufacturing plant. If so, it is a good idea to look over the commercial property lease if there is one. The lease will outline the landlord’s and the lessee’s obligations pertaining to the premises.
Common lease terms include the following:
- lease term;
- rent amount;
- landlord’s ability to change rent (rent review);
- repairs and maintenance obligations;
- permitted use of premises;
- description of premises;
- outgoings; and
- renewal options.
Sale and Purchase Agreement
If you are happy with the turnkey business and ready to buy, you can move on to the sale and purchase agreement (SPA). A SPA is an agreement between you and the seller concerning the goodwill and assets of the turnkey business. You can find this agreement on the Auckland District Law Society (ADLS) website or the existing owner will provide one.
Typical agreement terms include the following:
- purchase price;
- employees;
- intellectual property;
- amount of deposit;
- terms of the property lease;
- list of assets you are purchasing with the business;
- consequences if any party breaches the agreement;
- name of the turnkey business; and
- warranties.
Key Takeaways
Buying a turnkey business is an exciting move or career change. However, there are necessary steps to undertake to prevent future problems. First, you must sign an NDA with the existing business owner. After that, you can start conducting your due diligence process and request to see the commercial lease. Once you are happy with everything, you can sign a SPA to finalise the purchase.
If you need help buying a turnkey business, contact our experienced business sale lawyers to 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.
Frequently Asked Questions
A turnkey business is already in place and ready for you to take over. The company usually includes property, operations, employees, a business plan, and a customer base. Consequently, you can smoothly buy the business and efficiently conduct business activities.
You may first need to sign an NDA with the existing owner to conduct due diligence. After that, you can start investigating the business by looking at accounts, contracts, legal compliance levels, and valuations. If you encounter something that concerns you, it is best to talk to the business owner and ask questions.
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