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You may find that you have come to a point where you want to sell your business. Perhaps it is time to retire, or your circumstances have changed and running the business is no longer viable. Selling a business requires thorough and careful consideration of its value and what exactly you are showcasing for potential buyers. Otherwise, you could open yourself up to potential legal issues further down the track. This article will explain some of your legal obligations as a seller of a business and issues you need to consider.

Asset Sale vs Share Sale

Firstly, it is essential to distinguish between an asset sale (or a business sale) and a share sale. Whether you conduct an asset sale or a share sale will affect your tax obligations, so it is essential to consult with a specialist tax advisor. The key differences are that:

  • asset sales involve the transfer of your assets to the buyer, like your intellectual property or business equipment; and
  • share sales involve your company’s shareholders agreeing to sell their shares to the buyer.

This article focuses on your obligations when conducting an asset sale.

Preparing Your Business for Sale

The first thing you need to do is ensure that you are ready to sell your business. This entails tying up loose ends and following up with important contracts. You also need to decide how you will advertise your business to buyers.

As a part of the negotiating process, buyers will conduct due diligence as they decide to purchase your business. So, you should ensure that your business is in good shape by reducing any detracting factors. This means:

  • settling business accounts;
  • selling any assets the business does not need;
  • getting the business’ finances in order;
  • halting any long term investments;
  • reducing potential risks, such as health and safety compliance issues;
  • drawing up an effective business plan to show buyers;
  • summarising earning potential with financial forecasts;
  • drafting a succession plan; and
  • drafting an information memorandum for buyers.

If you are selling machinery or equipment as part of the business, ensure they are clean and in good repair before you sell.

Warranties

Promises or representations you make to the buyer about your business in your sales contract are warranties. If these are misleading and disadvantage the buyer in any way, you risk facing legal ramifications. Therefore, it is essential to be upfront about your business and be as accurate as possible with the forecasts you make.

When you outline the warranties in your sale and purchase agreement with a buyer, you should make sure that they are true and accurate

Ensure your business keeps accurate records, as they can help back up what you say to buyers. They suffice as comprehensive evidence for your claims.

What Are You Transferring?

You should also decide how you are going to sell your business. In an asset sale, the purchaser can pick and choose which assets they wish to buy. This means that the purchaser can leave you (the seller) with some assets and liabilities relating to the business after the sale. 

In a 100% share sale, the purchaser takes on all assets and liabilities of the company through which you run the business (whether known or unknown). 

Under an asset sale, you also need to consider how you will transfer existing contracts involving your business to the buyer. These contracts could include:

  • lease agreements for your business premises;
  • supply contracts with key product suppliers;
  • client contracts; or
  • employment contracts.

Further, you should ensure that you do not have any outstanding responsibilities under these contracts once you finalise your business’s sale.

What Legal Documents Do I Need?

You should write up the terms of your business sale in a sale and purchase agreement. This will outline the end product of negotiations with the purchaser and detail your obligations as a seller. It is important to ensure that the terms in this contract are fair and reasonable, and you follow through on any promises you make. This document will also include any conditions you need to fulfil before you can complete the sale.

For example, getting consent from your landlord to assign the premises, or from third parties to your key business contracts to the assignment of those contracts to the purchaser.

The conditions may also deal with matters to be completed by the purchaser before the sale is confirmed.

For example, the purchaser may specify in the sale and purchase agreement that they will not buy the business until they have completed a due diligence period.

Further, you will likely be sharing sensitive information with your purchaser, like client information or trading information. So, you may also want to draft and sign a non-disclosure agreement outlining what information is restricted and confidential between you and the purchaser.

Obligations to Employees

If your business has employees, you have responsibilities as an employer when selling your business. You may not be able to tell employees everything about the sale. However, you need to tell them about the sale proposal and make sure they know their options. This could mean transferring their contracts to the buyer as their new employer or terminating their contracts if they wish.

Key Takeaways

Selling your business is a complex process. Being upfront about your business and following through on any promises you make are crucial to fulfilling your various legal obligations. If you would like more information or help with selling your business, contact LegalVision’s business sale lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

How do I sell my business?

To sell your business, you should make sure that it is ready to sell first. This means tying up any loose ends, as well as drawing up a business plan for potential buyers. You should also complete any ongoing financial or legal matters. Likewise, you can find an independent expert to help you. This could be a lawyer or a business broker.

What are my obligations when I sell my business?

When you sell your business, you have to be upfront about its potential success and its current commercial state. You may also have different tax obligations that apply depending on how you sell your business.

Should I sell my business?

Whether you decide to sell your business depends on your unique situation and your business’ viability. You may decide that it is time to move on to something else, or perhaps your business is in a good state for selling. Either way, it is a big decision to make so you should consider all of your potential options.

Do you pay tax when you sell a business in New Zealand?

There is no capital gains tax in New Zealand, so you will not have to worry about accounting for that. However, GST (goods and services tax) may apply depending on how you sell your business, and there may be other tax obligations.

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