Buying or Selling a Business? Some Key Legal Tips

Whether you are buying or selling a business in New Zealand, consulting a lawyer is crucial to ensure a smooth, legally sound transaction. The process can be complex, involving multiple legal, financial, and regulatory considerations. We strongly recommend that a lawyer drafts or reviews the sale and purchase agreement, assists with due diligence, and helps facilitate settlement to ensure that all legal requirements are met.

Legal Aspects of a Business Transaction in New Zealand

Sale and Purchase Agreement

One of the most important documents in any business transaction is the sale and purchase agreement. This document outlines the terms and conditions of the sale, including the purchase price, payment structure, asset allocation, and warranties. In New Zealand, the agreement must comply with the Contract and Commercial Law Act 2017 and other relevant legislation.

A well-drafted agreement should cover:

• Warranties and indemnities – To protect both parties from undisclosed liabilities.

• Restraint of trade clauses – To prevent the seller from immediately setting up a competing business.

• Transfer of key contracts – Ensuring supplier, lease, and customer agreements can be transferred.

A lawyer will ensure that the agreement is fair, enforceable, and provides adequate protection for your interests.

Due Diligence and Regulatory Compliance

Before finalising a business transaction, thorough due diligence is essential. A lawyer will review the legal structure of the business, contracts, leases, employment agreements, and any outstanding liabilities. Common areas of concern include personal guarantees, hidden liabilities, and supplier agreements with change-of-control clauses.

A lawyer helps identify legal risks that could arise post-sale and ensures that necessary approvals and consents are in place before settlement.

Financial and Tax Implications

There are several financial and tax implications to consider in a business transaction. In New Zealand, these include:

• Goods and Services Tax (GST): Depending on how the transaction is structured, GST may be applicable under the Goods and Services Tax Act 1985. A lawyer, in consultation with an accountant, can help determine whether the transaction qualifies as a "going concern" sale, which may be zero-rated for GST purposes.

• Income Tax and Capital Gains: While New Zealand does not have a general capital gains tax, certain profits from the sale of business assets or shares may be taxable under the Income Tax Act 2007.

• Structuring the Deal: Whether the transaction is structured as a share sale or an asset sale impacts tax and legal obligations.

  • A share sale involves buying the company's shares, meaning existing liabilities transfer to the buyer.

  • An asset sale allows the buyer to purchase selected assets, potentially reducing exposure to past liabilities.

  A lawyer can help negotiate terms that are financially beneficial and minimise tax liabilities in consultation with an accountant.

Risk Mitigation and Legal Protections

A lawyer plays a key role in identifying and mitigating risks associated with the transaction, including:

• Addressing potential liabilities tied to the business, such as debts, guarantees, and ongoing litigation.

• Ensuring warranties and indemnities are clearly defined to protect against undisclosed risks.

• Reviewing lease agreements and supplier contracts to prevent future disputes.

• Protecting intellectual property and trade secrets.

Failing to address these risks can lead to unexpected legal and financial challenges after settlement.

Dispute Resolution

Disputes can arise during or after a transaction, particularly over breach of contract (e.g., failure to disclose liabilities); misrepresentation (e.g., providing false or misleading financial information); and financial adjustments (e.g., disagreements over working capital calculations).

A lawyer can assist with negotiations, mediation, arbitration, or litigation. Alternative dispute resolution mechanisms, such as mediation or the Disputes Tribunal, can help resolve conflicts efficiently.

Transition and Business Continuity

For a seamless transition of ownership, a lawyer ensures that all legal aspects of the transfer are completed properly, including:

• Assigning or novating contracts (e.g., supplier, customer, and lease agreements).

• Transferring business licenses and regulatory approvals.

• Managing employment obligations and staff transitions.

• Handling intellectual property and branding rights.

A well-structured legal transition plan prevents disruptions to business operations and ensures continuity for employees, customers, and stakeholders.

Expert Legal Guidance

Buying or selling a business in New Zealand can be a complex process requiring careful legal oversight. Our commercial lawyers bring a wealth of experience and knowledge to the table, helping you navigate the process efficiently and with confidence. If you need legal advice on a business transaction, contact our commercial team today to discuss how we can assist you.