ON THE MOVE

January 2011 – ON THE MOVE

Article 1

Deciding to purchase a business.

PUBLISHED QUAY LAW LEGAL ARTICLE by Ian Mellett (Quay Law NZ)

In this article, Auckland lawyer Ian Mellett of Quay Law NZ Barrister and Solicitors discusses some of the legal matters that you should consider when deciding to purchase a business.

The decision to purchase a business is both exciting and daunting. On the one hand it signifies the start of a new venture, yet on the other it raises the uncertainty and risk inherent in any commercial undertaking. You may also be unsure as to whether to buy an existing business or to start your own from scratch. Generally speaking when you buy an existing business, there should be existing customers from day one which will ensure an instant cash flow. However if you start from scratch, then you will need to generate new customers. Both approaches have their own hurdles that you will need to overcome, and particularly so in light of the tough economic climate currently prevailing. It is important that you engage your professional advisors at an early stage in the process. Your lawyer and accountant, along with a business broker if there is one involved, are well placed to give you the necessary input and advice to enable you to make an informed decision. There are various aspects which require careful consideration. Some of these are set out below:

The Agreement

It is preferable to use the standard Legal Areement for Sale and Purchase of a Business which has been compiled, and amended over the years, by the forms committee of the Auckland District Law Society. The agreement, much like its counterpart for residential and commercial property transactions, is designed to cater for the needs of both the vendor and the purchaser. Always ask your lawyer to cast his eye over the agreement before you sign the document. There are a number of things that need to be considered, including the names of the vendor and purchaser; what is being sold; the price; terms of payment; warranties by the vendor; conditions such as the obtaining of suitable finance, solicitor’s approval (if appropriate) and due diligence; possible restraints of trade and all issues relating to existing employee contracts.

ARTICLE 2

Legal entities to consider when buying a business in NZ

PUBLISHED QUAY LAW LEGAL ARTICLE by Ian Mellett (Quay Law NZ)

In this legal article, Auckland lawyer Ian Mellett reviews the various legal entities that are available to you when deciding upon the appropriate operating structure for your New Zealand business.

In a previous published article, I discussed the matters that should be considered when deciding to purchase a NZ business. A key aspect in this process is necessarily the choice of the most appropriate purchasing entity. It is important that you obtain the requisite advice from both your lawyer and accountant, as they will be in a position to explain issues such as limited liability protection, tax and succession planning to facilitate an informed decision being made.

There are four main entities that are predominantly used to operate businesses in New Zealand, namely the sole proprietorship, partnership, limited liability company and trading trust. Each of these is discussed briefly below.

Sole Proprietorship

Also known as a sole trader, this is a type of business entity that is owned and operated by one individual on his or her own. The key characteristic is that the owner is inseparable from the business, in other words there is no legal distinction between the owner and the business. The owner controls, manages and owns the business, is entitled to all the profits but is also personally liable for all losses, debts and taxes. A sole trader is usually able to establish the business without following any formal or legal process and can employ other people to assist in running the business.

The obvious advantage of a sole proprietorship is that it is easy to start and run, and there is no requirement regarding registration. The major disadvantage is that the business owner/s has unlimited personal liability for all business obligations (including amongst others debts and taxes), which means that personal assets are potentially at risk. Sole traders also often lack credibility in the marketplace, and it is invariably more difficult to sell this type of business.

Limited Liability Company

This entity is by far the most popular and successful form of business structure. A company is a formal and legal entity in its own right, being separate from its shareholders or owners. The protection that a limited liability company affords to its shareholders is the primary reason for selecting this type of operating entity. If the company is unable to pay its debts, the shareholders are not liable for the business debts of the company unless their shares are not fully paid up, or they have given personal guarantees to lenders or creditors, or they are also directors of the company and have traded recklessly. This situation should be contrasted with a sole proprietor or partner who will always be exposed and personally liable for any business debts that cannot be met by the business.

The advantages of a limited liability company are continuity of existence (a company will continue to exist until it is removed from the Companies Office register), transferability of shares (making it easier to sell a company or pass on to others such as children) and marketplace credibility. The disadvantages are that directors need to clearly understand their responsibilities under the companies legislation, and the fact that the limited liability protection can easily be eroded in practice by the requirement to provide personal guarantees to certain lenders or creditors.