What is a business sale and purchase agreement?
Use an agreement for sale and purchase of a business (abbreviated to ASPB) to transfer part of, or an entire business to another. The acquirer may be an individual, a partnership or a company. The business may be any of a range of industries and sectors in New Zealand.
Usually, it is the assets that are sold and the liabilities retained by the seller. Assets may include land and buildings, plant and machinery, equipment, stock, work in progress, and intellectual property ('IP') such as a website or customer database. In other words, any part of an operational business.
Suitable for use by both the buyer and the seller
Usually, it is the acquirer who proposes the terms of the contract when buying a business. The reason is that they have a greater need for legal protection because they know less about the business than the seller.
However, there is nothing to stop the vendor from proposing initial terms.
Our business sale agreement template protects both sides. By including a greater number of warranties, the contract can be made to favour the acquirer.
To use this business purchase agreement, edit with the exact terms you agree, have both sides sign it (no witness necessary), and date it to make it legally binding. There is no requirement to take legal advice or any other sort, although you may wish to do so if there is much at stake.
Much needs to happen before you reach completion. The buyer is likely to want to know everything and the seller still wants to avoid reducing their purchase price.
Provisions within these business sale agreements
A standard agreement contains general terms, which are common to many commercial law contracts, and further terms that are specific to buying a business in a particular industry.
The following provisions are common to most of these business sale agreements, but sometimes the ways they are applied are differently for each.
As an example, every buyer will want to prevent their seller from setting up in competition, but how we make that happen is not the same for every transaction.
Identity of the subject of the sale
The business name may not be enough if it is merged into another organisation. Identifying exactly what is being transferred is important for future reference.
Similarly, excluded assets may be important to note.
The parties could be companies or one or more individuals.
We would suggest that the buyer should insist on a guarantor. This is particularly important when the vendor is a company that might cease to exist the day after the closing date of the deal.
Creditors and liabilities
The buyer buys the assets in the business. Debts remain due to be paid off by the seller (most likely from the proceeds). The buyer does not take them on. However, we provide for the seller to agree to pay them off promptly so that suppliers do not hesitate to supply the new owner.
Price apportionment within the payment terms
The price payable is probably the thing most on the mind of both parties.
However, it is not just a question of a lump sum payment, whether for cash or shares in acquirer.
How it is apportioned between goods, goodwill, fixed assets, and IP may also be important for both the seller and the buyer for efficient tax planning.
Timing of payment is not apportioned.
Cover all the angles at completion
In the excitement of the completion, it is very easy even for professionals to forget something.
Every contract provides a list of documents and other things to be exchanged at completion.
Competition by the seller and confidentiality about the deal
There are restraints against future direct competition by the seller in tough terms, cover for the confidentiality of the terms of the deal itself and many other matters.
We believe our careful words will minimise the freedom of a seller to compete after the sale. If you are a seller, of course, you will want to edit these accordingly.
Note that in the course of the acquisition, both parties are likely to learn confidential information of the other, not just the buyer about the seller.
Transfer of IP
We have assumed that every business will use its website in ways we would expect. For example, a repair garage might not have a website at all, but if it does, it will not use its website for e-commerce.
There may be other IP that needs to be registered at transfer, such as trade marks.
So much depends on warranties
The basic structure on any business purchase or business sale agreement is based on warranties. Warranties are promises made by the seller to the buyer. Over the years they have evolved into a system whereby each warranty stays in the same exact form as the buyer wants and is not edited. Instead, if the seller cannot make the promise, they qualify its terms as part of a disclosure letter.
The warranties we provide in our business sale agreement give generous cover to the buyer. You will probably want to delete a few, but they are drawn to be appropriate for the particular type of transaction to which that document relates.
We have taken great care to draw the warranties in simple language so that both sides are absolutely clear about what is being warranted. We have included a large choice because it is easier for you to remove what you don't need than to word new warranties yourself.
Some of these include up to 100 warranties covering a wide range of affairs, from tax and accounts to contracts, the real properties, employees, IP, information technology and more.
Timing of the deal
The real life experience of our legal team is that it is more efficient by far, to complete the deal on the day the contract is signed than to sign it for completion and payment at a future date. The main problem with future completion is that an awful lot can change in the course of a few days.
The downside of same day completion is that transfers of some property simply cannot be arranged as the bank draft is handed over. This applies most obviously to transfers or real property, leases, domain names and sometimes licensed IP. In these agreements, we have covered these points as far as possible, but much of it is down to you to arrange for everything to come together when the cash is handed over and the settlement date finalised.
What property will be handed over at completion
The buyer will need to know what they will take ownership of when the purchase price is transferred.
The list includes software, hardware, customer information, stocks of goods, special information letters to suppliers and customers - and anything special to your business that you need to add.
Most businesses trade from a location. We have provided for the possibility of the seller also selling the commercial property used by the business. Where specified, the agreement is also an enforceable contract for sale of the property.
In other cases, a business will lease its property. We have provided for that too in a transfer of the leasehold interest. So unless we note otherwise, each document covers the commitment to complete the property transfer (when you will need a conveyancer) as well as a sale of the business.
Extensive notes to help you
Most people do not buy or sell businesses often. Even if you have done so before, it may not have been for some time.
Our guidance notes are particularly detailed, running in most cases to half the length of the contract and warranties combined.
Buying or selling less than the whole business
We have included in this section three other templates of purchase of business agreement for slightly different circumstances.
Transfer into a company structure
When your business reaches a certain size, you may wish to transfer it into a corporate structure in order to benefit from the limited liability that this business structure offer.
If so, you would likely transfer all of the business assets to that new vehicle, unless there is an advantage (such as one for tax) in keeping back some to sell at a later date, to license or lease.
You sign this ASPB twice - once for yourself as seller and once as director or partner of your acquiring company. You do not need a witness for this sort of contract, but it may be a good idea to have one so that the date of the agreement cannot later be challenged.
You should record the terms of the transfer in the business purchase agreement so as to satisfy the requirements of:
- your new company in respect of the Companies Act 1993 to keep minutes of the meeting authorising such an important transaction
- Inland Revenue for calculating tax liabilities and for transferring tax obligations
- your bank, particularly if you are a borrower
- you, so that you have records of who owns valuable assets including IP
Purchase of assets only (including hive-down)
This business sale agreement is for buying or selling assets, rather than the whole business as a continuing concern.
You could be selling or buying plant, equipment, a customer list, vehicles, stock, work in progress, software, insurance re-claimed goods, fire-damaged goods, or any other asset.
The only thing that you should not use this business purchase agreement to buy or sell is real property (land and buildings).
The key point about this business sale agreement is that the seller gives no warranties.
Particularly we envisage that it might be used for a hive-down or any other sale by a liquidator or administrator or trustee in bankruptcy.
Purchase of used plant or physical assets
This business sale agreement is for a straight purchase of business assets. The transaction is not a sale of business. It could cover any goods at all, but drawn particularly for bulk deals. It can be used where the counter-party may be any person or organisation in any country.
Whatever the asset or parties, this sale agreement provides protection to both sides with a set of fair terms.
Alternative forms to the Net Lawman agreements
If you are buying through a business broker, they might offer to complete a purchase and sale agreement form for you as part of their service. That is most likely to be the Auckland District Law Society (abbreviated to ADLS) Agreement for Purchase and Sale of a Business Fourth Edition 2008 (6).
The advantages of this form are that:
- it is standardised, and therefore many business sales specialists and professional advisers are familiar with it so that it is fast to complete and review; and
- it contains all the provisions needed to transfer ownership of a small or medium sized business.
The major disadvantage is also that it is standardised. Because it is published as a set of non-negotiated terms and conditions (as a form), it is very difficult to vary those terms in a negotiated sale situation, or where the buyer needs greater protection in particular areas. From a sellers perspective, during the due dilligence stage, the form lays bare many things that otherwise might not be disclosed except to an experienced buyer.
Deletions can be seen easily. Additions are difficult to make.
Note that there is no legal requirement to use this form rather than any other contract. It is simply written by the Law Society to make handling transactions easier for its members.
It includes limited warranties, which may not cover areas of the business that are important to the buyer such who owns intangible assets or what the exact licence terms of intellectual property are.