For many people the sale of their small to medium sized business is the culmination of many years of hard work.
It is often the sale of a business that started on the back of an envelope which has grown over the years to be a profitable and rewarding business.
Alternatively the purchase of such a business is often a big first step for people looking to start their business careers.
Given this, one might expect that prospective business purchasers would have obtaining legal advice forefront of their minds before entering into contracts to buy or sell. Unfortunately it is often not the case, with less than ideal outcomes for all.
When buying or selling a home, nearly all contracts utilise the standard form of contract known as the Auckland District Law Society (ADLS) agreement for the sale and purchase of real estate. The same applies with businesses where a standard form of contract is also prepared by the ADLS. We often find this is where the mistakes start.
Those who have experience in the real estate industry have become familiar with the terms of the ADLS standard real estate contract and believe the business sale agreement is much the same. However, the real estate agreement is much simpler to complete and can often be prepared without solicitor involvement.
This mind set leads to mistakes in the form of agreement and also their view of the simplicity of the transaction.
Unfortunately we have seen too many examples of business sales hitting troubled waters due to the form of contract. We have seen the following issues in the past year:
1. the vendor company not being the vendor on the agreement, the named vendors were selling something they did not own;
2. the tangible assets figure being too high which has tax implications;
3. the vendor being in default of its obligations under employment law because of redundancies and the staff being "vulnerable employees";
4. the vendors being unaware they could not operate a business after the sale in the town because of a restraint of trade clause;
5. the parties not understanding (because an agent had advised them) that there is a condition in the standard form of contract whereas in the real estate standard agreement a condition needs to be specified;
6. the stock figure being incorrect and the procedure for a higher stock figure on settlement stocktake not being understood or even completed;
7. the GST information being incorrect.
At the end of the day, the sale and purchase of a business is more complex than a standard residential sale and accounting and legal advice should be considered at an early stage.
Andrew Thomas, associate at Treadwell Gordon, Whanganui