In this article I want to tell you some key points that I have learned about setting up an impact driven organisation in Aotearoa New Zealand. This applies whether that ends up with a charitable structure or a for profit structure or some form of hybrid. The reason that I know about this is my job is as a Partner at Parry Field Lawyers where I have a unique practise of law focusing on helping purpose driven people achieve their mission. Also, with more than 200 interviews for seeds (www.theseeds.nz) I have spoken with some of the best entrepreneurs in New Zealand and gained their perspectives.

So to download all this information to you I am going to share here about three things I think are key to know. I would be curious if you agree with me, and it might be that you know others who would appreciate the challenges because I am going to give it to you straight. I commonly go through these points – probably 2 or 3 times a week – with people who are wondering about setting something new up so this is also going to be a lot more efficient as I can get people to listen to it before speaking about the specifics of their situation.

• First, I will discuss the three key questions to ask before considering the detail of what structure is best.
• Second, we will look at three of the most commonly used legal structures for impact driven people.
• Third, some reflections on the way to enshrine impact within those structures and the key things needed.

So let’s turn to the high level questions you need to get right from the beginning. Don’t skip over this part…

Part 1: The Three High Level Questions to ask first

What is your purpose?

The first thing to remember is that the purpose and mission needs to come first. What is it that you really want to do? The detail of what legal vehicle to choose then becomes a secondary consideration that is about how you best fulfil your purpose. I encourage you to clearly articulate your mission and your purpose because that will drive all other decisions. This is the “power of why” and will be what you come back to when things get blurry and you wonder why you started on this journey. Also I want to know what that is in just 30 seconds – not the 5 page version, just the three short bullet point version. If you can reduce it down to that then you will be able to convey it clearly to others as well.

So why is getting the purpose important?

The purpose is the first key consideration. Why? Well I like to think of it like this – if you go buy a car there are many options. You might want to get an off road 4×4, or a convertible, or a 7 seater – there are a range of vehicles that depend on what your purpose is. In the same way when choosing a legal vehicle we need to understand the purpose of what you want to do. Think of a limited liability company as one type of special purpose vehicle, the same with cooperatives, incorporated societies or charitable trusts. So we need to know the direction you want to head in order to decide on the right vehicle.

What fuel is driving the vehicle?

The second key consideration comes from Jerry Maguire and the phrase “Show me the Money!”. Money is like the fuel that is needed for the vehicle to run – whatever type is chosen. There are two parts to this which affect the decision. Where is the money coming from – sales of product or services, private investment by issuing shares, loans, donations or grant funding? And also, where is the money going to – will there be private profits for individuals or will the funds be reinvested back to promote the mission? All of these factors are critical to work out what structure is best.

Replication?

The third question is a bit different. But before we get into the legal structure options I think it is important to ask this: Is there someone out there already doing what you plan to do? We see in New Zealand a lot of replication where people want to do good and assume that to do so a new initiative is needed. I don’t think that is always the case. If the mission and purpose is most important then strip away any ego associated with founding something new and ask the hard question: for the good of the cause am I better to come in as a strong supporter and work with others already doing the mahi? This may sound like a strange thing to be proposing since my job is to act for people setting something up so I am doing myself a disservice by advocating this thinking – instead I could fan the flames of starting something new. But there is a bigger picture here and if I can encourage one person to not start something new and instead come in as a big advocate and supporter of a struggling initiative that just needs some volunteers then that will be better overall. So please do look around and have conversations about collaboration before going off and setting up something new.

Part 2: The three best types of legal structures to consider

There are many possible structures but I am going focus in on the ones I think are the simplest and easiest ones. There are basically three options. They are:

Set up a Company: This is a commonly understood vehicle for running a new initiative. As a positive you can privately benefit through dividend return to shareholders, you can more easily access investors by issuing them shares, people understand the structure over other options. The key ingredients are a director, a name and a shareholder. The downside is that you will be less likely to get grant funding or donations, people make assumptions that what you do is driven by profit rather than purpose, so there can be a lot of explaining needed, and if taken over the company might lose the essence of why it was originally founded. I am setting up many impact driven companies so am happy to discuss all this in more detail if anyone would like to know more.

Set up a Charity: Setting up a charity provides a nice vehicle because you are forced to write down you purposes – I think that is a good thing. You need to fulfil one of four charitable purposes: Advancing education, reducing poverty, advancing religion or purposes beneficial to the community. So just because what you want to do is “good” doesn’t necessarily mean that it will be charitable. Becoming a charity results in significant tax benefits because you are helping society – for example, you can issue tax deductible receipts to donors. However you will not be able to privately benefit (apart from market rate salaries), will not be able to issue shares that return dividends to shareholders (unless to another charity) and will have difficulty raising capital funding. One common misconception is that a charity must be a Trust – in fact, companies can be charitable as well it is just that they must clearly articulate that there is no private benefit and state what the purposes are. I am setting up several charities each month across the full range – recent examples include an ocean focussed charity, one setting up Buddhist temples, one working with children on design thinking – a very large range.

Hybrid option: Remember the “show me the money” point earlier? Well this is where it kicks in – if funding is coming from private investors, this option is preferred over a charity. Whereas if funding is likely from grants or donations, then the charity option may be preferred. There is no one template that will apply for all. While it involves some duplication of having two entities, sometimes what I see people end up considering is a hybrid option. This involves having a company while also setting up a Foundation which is a charity. How closely aligned they are will depend on the circumstances. If setting up a charity then part of the thing to consider is having independence in that charity so there is no chance of a conflict of interest. Ultimately this is all about finding the best way to have maximum impact. Increasingly I am seeing pull from either end – private companies wanting to give back through creating a charity, while charities are looking to commercialise some aspect of what they do in order to generate another income stream. I think the lines will continue to blur as we increasingly move towards discussions of impact being the most important thing. Like I said at the start it then is down to the detail as to the type of legal structure used as the overarching point is that mission and purpose and impact are being implemented.

Part three: Enshrining impact

I want to finish off with a few thoughts about how we started – a focus on impact. Thinking about each of the structures discussed I would just comment that for a charity you are required to set out the purpose you want to achieve, which I think is a really good thing.

For a company, it is not legally required to set out what your mission is – which I think is an oversight that one day will be corrected – but it is possible to enshrine your impact by setting out your mission in a constitution. That is a public facing document and if I get involved I try to have clients articulate their mission and purpose right at the start so that they are open and clear with the world about what they are there for.

I would encourage you that whatever entity type you end up choosing that you really come back to the mission and purpose and clearly set out what it is. I can guarantee that will be the most valuable point to get straight. Once that is done then it will help you to decide on the detail of which type of entity to choose. You may notice that this summary focusses more on the high level questions than the detail – that is on purpose.

My final thought is to consider how you report on impact – wouldn’t it be great if we all started measuring and talking about impact in ways that get beyond financial metrics. It is really hard to do but research it and get amongst it to lead the way in how you measure and talk about the impact you are having. If you can do that then I am confident your venture will be more assured of success.
I’ve enjoyed reflecting on this topic and would be happy to discuss further with you – and if I directed you here to listen before we have a phone call then I look forward to chatting sometime soon.
Until next time.

Note: This is a short overview of issues – inevitably situations will be different for each context and you need to consider a variety of issues such as Financial Markets Authority rules, Tax considerations, employment, shareholder dynamics, among many other things. But the point of this is to provide some high level thoughts to get you started.

Steven Moe is a Partner at Parry Field Lawyers with 20 years experience and a focus on empowering impact

Steven can be contacted on:
E stevenmoe@parryfield.com
T +64 21 761 292

We recently attended a webinar by the Overseas Investment Office (OIO) on 20 July 2020. The purpose was to discuss some reforms to the rules and in particular the new “Urgent Measures Act”.

The purpose of the new changes are to support the Government as part of its business response to COVID by encouraging growth through investment. So there are some simplifications made to the normal OIO process– while also ensuring there are rules in place in relation to sensitive land and other categories of assets.

Before we get into detail it is worth noting that the guides on investing in New Zealand at the OIO website are quite helpful, for example, this one on which transactions need consent.

Overview

There are four key changes:

1. Temporary Emergency Notification Requirements;
2. New national interest assessment;
3. Simplified screening; and
4. Stronger enforcement powers.

In this article we will set out the key points for each of them.

1. Temporary Emergency Notification Requirements

Notification is required in relation to ownership/control there are (no monetary thresholds) and will be needed for increases above 25%, ownership beyond 50%, 75% or to 100%. They said that this is a deliberately broad approach they said. This is a temporary regime which will only apply for a limited time.

Who needs to notify? This should be done by any person who has more than 25% overseas ownership, are non-citizens and non-residents, and have more than 25% control of a board, as well as those who are associates.

What needs to be notified? Purchase of more than 25% of a business, increases in key thresholds (above) and purchase of more than 25% of the property of an NZ business (including land interests that would not be sensitive).

When to notify? 16 June is when legislation came into force, so only for those deals after that.

What do you not need to notify? If you already have consent, or if you need consent under another criteria.

Examples of when notice is needed:

Direct: An overseas entity buying all shares of an NZ company – needs to be  notified, even if a shell company.

• Indirect: Overseas person buying an Australian company that has an NZ entity – need to notify (ie even though already overseas owned).

• Notification of property: If a company is being bought that has property, then you need to notify. If a lease to an overseas person, then it depends if that is more than 25% of the value of the NZ companies property at the NZ Company.

There is no cost to notify and there is a form online. There is a much higher level of information needed than normal. It will take around 35-40 minutes to fill in the form. The type of information required includes type of transaction, if there is a target entity, the investor themselves etc.

Once submitted, they will assess if more details are needed or if the transaction can be approved. Generally this takes around 10 days (if the transaction can proceed). A few applications may be allowed to proceed subject to conditions. A few applications may be denied or need more information.

If more information is required, then you will need to allow a total of 40 working days and the aim is to resolve all within 70 working days.

If a transaction is not notified, there can be serious implications. The highest penalty would be civil penalties of up to $10million.

2. National interest assessment

The OIO emphasised that they want investments to proceed. So the question they ask is going to be:  “Is the transaction  is contrary to the national interest?” This test will be applied:

• If further assessment is needed;
• If it is a strategically important business; and
• If the Minister of Finance wants to ask more questions about an application.

The OIO will look broadly at factors such as competition, social impacts, character of the investor, national security, public order, international relations, alignment with NZ values and interests as well as broader policy settings. The factors are very broad. As an example, they would look more closely at military technology investments than other investments.

An application could have conditions added to manage risks, or it could be prohibited or it could just proceed without conditions.

3. Simplified Screening

This simplified screening includes that low risk transactions that do not need consent eg small increases in shareholding. There are also automatic standing consents for eg listed entities that are not more than 50% owned overseas, land adjoining sensitive land, managed investment schemes and some debt transactions.

As an example, if an overseas person is buying land next to sensitive land, that may qualify for the automatic standing consent. Also, some loans and debt can qualify for automatic consent.

4. Enforcement powers

These are increased, such as adding enforceable undertakings as a possibility as well as maximum penalties including  (changing from $300,000 to $500,000). For a company, it could range from $300k to $10 million. The reason for this is that breaches are serious and so the penalty reflects that.

Conclusion

Overall it appears that the intention is to allow easier investment in New Zealand. However, as you can see from the detail in this short update it is worth speaking with advisors about the particular context as there are likely to be additional points to consider to ensure you qualify for the simpler regime.

For more information the OIO website has a lot of detail. For example, the above is discussed here https://www.linz.govt.nz/overseas-investment/changes-overseas-investment-act.

Please note that this is not a substitute for legal advice and you should contact your lawyer about your specific situation. Please feel free to contact us on 03 348 8480 or by email to Steven Moestevenmoe@parryfield.com or Kris Morrisonkrismorrison@parryfield.com

 

On 30 June 2020, the long-awaited Privacy Bill received Royal Assent, with the changes coming into effect on 1 December 2020.

Privacy Commissioner John Edwards has said “The new Privacy Act provides a modernised framework to better protect New Zealanders’ privacy rights in today’s environment.”

Some of the key changes include:

• All agencies will be required to report serious privacy breaches to the Office of the Privacy Commissioner. If the breach is likely to cause serious harm, the people affected must also be informed. This is consistent with international best practice.

• If an agency uses service providers based outside New Zealand, they will need to make sure the providers meet New Zealand privacy laws.

• Criminal offences will be introduced. An agency could be fined up to $10,000 for misleading an agency about someone’s personal information and/or intentionally destroying requested personal information.

• The Privacy Commissioner will have the power to make binding decisions when someone requests access to their personal information. These decisions may be appealed to the Human Rights Tribunal.

• International digital platforms that obtain New Zealanders’ personal information through business in New Zealand must comply with New Zealand privacy law, regardless of where the servers are based.

• The Privacy Commissioner will have the power to issue compliance notices. Non-compliance with the notice could result in a fine of up to $10,000.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. If you think your privacy policy is insufficient (or non-existent!), we would strongly encourage you to get in touch with us. Contact Steven Moe at StevenMoe@parryfield.com or Aislinn Molloy at AislinnMolloy@parryfield.com.

Our Partner Steven Moe has collaborated with Arts and Not for Profit leader Anne Rodda to co-write the White Paper, “Tomorrow’s Board Diversity: The Role of Creatives” which can be

downloaded here.

This is part of our ongoing initiative to support thought leadership regarding Governance and the Arts, NFP and ‘For Purposes’ initiatives in Aotearoa New Zealand. Other examples include the just released “Charting the Future: A Framework for thinking about Change” here. To find out more about us have a browse of this website and the free resources in the tab above. If you have comments on the paper we’d love to hear them, email stevenmoe@parryfield.com.

Advance readers of the White Paper have commented:

“This White Paper brings to light a topic which is often neglected: the role that creatives can play on boards. In our experience, directors who have a range of diverse and creative talent, capabilities and knowledge bring different perspectives to decision-making, planning and board culture – that will likely enhance an organisation’s performance, as well as better represent the stakeholders.”
Kirsten Patterson (KP), Chief Executive, New Zealand Institute of Directors.

“I have been fortunate to always have had a strong musical and artistic background that has become the pillar stone to my creative success in business.” Sir Michael Hill

Parry Field are now registered as a Service Provider under the Regional Business Partner Network. If you are looking to grow your business but require some support, you may qualify for vouchers to help pay for services, as Parry Field are able to provide legal support in the following categories:

Business Planning: We can provide training for Directors of businesses who are looking at their plans and considering what changes they might need to put in place or those who are looking to start a business and are planning the first steps they need to take when it comes to legal structures.

Capital Raising: Growing your business is important and we can provide training around how business owners can raise funding for their venture, covering topics such as types of investors, due diligence processes, Financial Market Authority rules and documentation often needed, such as share Sale and Purchase Agreements and Shareholder Agreements.

Governance: It is important that you have all the right practices, processes and policies in place in order to guide your business in the right direction. Therefore, it is important to know and understand how to run a business, as well as the legal obligations that are associated with it. We can provide you with the knowledge of different legal structures that will assist you in deciding the best structure for the business based on what stage it is at. We will also assist with director duties, governance documents, explain how these work and the importance of having the right documents in place.

If you would like to know more, please contact the Regional Business Partner Network www.regionalbusinesspartners.co.nz

The Government recently introduced a one-off loan for businesses and organisations impacted by Covid-19. Applications must be made by 12 June 2020 through myIR.

  • Eligible applications can receive $10,000 plus $1,800 per full-time employee with a maximum loan amount of $100,000.
  • Once approved, most applications will receive the funds within 5 working days.
  • Applicants will have 5 years to pay off the loan with an annual interest rate of 3%.
  • The loan will be interest free if paid off within 1 year.
  • Repayments are not compulsory for the first 2 years.
  • You can choose to borrow the maximum amount or a small portion.

These loans are also accessible for NFP, Charity, NGO entities who meet the criteria. IRD recently attended a hui organised by one of our Partners, Steven Moe, and in the video here they explain how the system works and run through slides describing it. The relevant parts are:

00:00 Introduction from Steven Moe

02:14: Stewart Donaldson from IRD overview of what they are involved in currently

05:25: Rata Kamau from IRD with an overview of the Small Business Loan Scheme

20:40: Rata and Stewart answering questions.

Those thinking of applying should obtain financial advice to determine whether this is appropriate for their situation.

Click the following link to start your application.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Aislinn Molloy at aislinnmolloy@parryfield.com should you require assistance.

In part one and two of our articles on buying and selling a business we looked at both the important issues and what the agreement for sale and purchase should cover.  In part three, we will consider the impact of Covid-19 and how it has affected the buying and selling process and further points that need to be considered during these unprecedented times.  Whether you are considering selling or purchasing a business, or you have just started the process, the following should be taken into consideration:

Due Diligence

In part one, we explored the importance of due diligence and key questions that should be asked. The effects of Covid-19 should not alter your approach to carrying out due diligence, in fact it may be that a more rigorous approach is taken by buyers to understand the implications Covid-19 has had on the business and how it would fare if another situation like this were to happen again. When carrying out due diligence, both seller and purchaser should be mindful that more time may be required to undertake and complete the process due to the restrictions in place, as the ability to obtain information such as important documentation or carrying out physical inspections may not be possible right away.

Material Adverse Change Clauses

As we are in the midst of the unknown, agreements between buyer and seller will be subject to greater scrutiny and negotiation. The inclusion of material adverse change (MAC) clauses in an agreement is likely to be of particular interest, especially to a buyer. A MAC clause is used to reduce risk and uncertainty for buyers during the period between the agreement and the date the deal closes. Such clauses give the right for the buyer to walk away from a deal. For a seller, taking the current climate into consideration the inclusion of such a clause should be drafted carefully, thinking about what is considered to be a change and looking to the future and the potential of a similar situation occurring again.

Finance

As a buyer, if you are obtaining finance from a third party such as bank, it may take longer and become more difficult. In these uncertain times, banks may be reluctant to lend or may seek additional requirements are satisfied in order to obtain approval. Therefore, it important that the sale and purchase documentation covers the risks that are associated with lending during this time.   For example, the seller may want to include a break fee, if finance is unable to be obtained by the buyer. Where a buyer may want the ability to walk away from the deal and have a financing out condition. It will be up the parties to balance the risk and reach an agreement that they are both comfortable with.

Warranties

In this current climate, sellers may be reluctant to agree to warranties about the state of the business, as the long term effects of Covid-19 on a business may not be known for some time. While for buyers it may be that they look at additional situation-specific warranties in relation to this pandemic. Warranties will be subject to robust negations even more so than before, therefore again, it will come down to the parties being able to find the right balance in terms risk.

Other Conditions

The uncertainty for many businesses during this time may see the inclusion of other conditions in a sale and purchase agreement. Such conditions may relate to maintaining current suppliers or current employees.

Conclusion

As the restrictions ease, many are still trying to navigate their way through the unknown.  It is difficult to know the long term implications of Covid-19 and effects that it will have had on the businesses that survived the lockdown period. Therefore, it will be important for those looking to buy a business to ensure they have done their ‘homework’. While sellers will need to be upfront and ensure they are covered if a situation like this were to ever occur again.

We often help both buyers or sellers of businesses and in this unique context would be happy to talk about your situation to make sure the agreements work well.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

When an employer is considering making an employee(s) redundant, there are three key steps they need to get right:

  1. Following the terms of the employee’s employment or collective agreement and, in particular, what it says about making employees redundant.
  2. Making sure that the reasons for the redundancy are “genuine”, rather than, for example, simply a cover to remove an underperforming employee. In other words, being able to demonstrate that any redundancy is genuinely justified on the basis of valid commercial grounds.
  3. Following a fair and reasonable process.

At the centre of this is being clear from the start about why a redundancy may be needed in the first place.

This may seem obvious but not infrequently we see employers coming unstuck at this point.  They are unclear and/or imprecise, sometimes in their own minds but, more frequently, when communicating with the employee, about why exactly they are proposing to remove a role and what evidence they are relying on to back up that proposal.

The law is clear that it is not enough for an employer to say or show that it genuinely believes a redundancy is required.  While an employer is entitled to make their business more efficient, whether or not the business is in financial dire straits or not, an employer must still:

  1. Be able to clearly advise the employee, and with sufficient detail, about what the relevant issues are, giving rise to a possible redundancy;
  2. Provide the employee with accurate evidence substantiating those issues; and
  3. Give employees a real opportunity to be able to comment on those issues and, in particular, put forward alternative proposals if they are able to.

This means that, in general, it is not enough to simply advise the employee in broad, imprecise terms, as to why a redundancy is proposed.  For example, to simply say that the employer has reviewed the business and redundancies are necessary to “streamline” the business, improve efficiencies or to save costs.

While those – making a business more efficient or saving costs – can be valid reasons for a restructure, the employee is entitled to know more on the how and why.  The courts have been clear that:

“there must be made available to the other party sufficient information to enable it to be adequately informed so as to be able to make intelligent and useful responses” or, put another way, there must be “the provision of sufficient information to fully appreciate the proposal being made and the consequences of it and, secondly, an opportunity to consider that information and, thirdly, a real opportunity to have input into the process before a final decision is made.”

Consequently, in the example given, this may include providing information on:

  • What the employer’s review of the business showed? What issues were revealed?  For example, “over the past 6 months, we have experienced an X% downturn in work in these areas.  This is as a result of the loss of the X and Y contracts, which, on re-application, were re-tendered to Z Group.  The effect of this on the company is that revenue has dropped over the same period by an average of by X% and productivity by X%.  We are anticipating that these figures will continue over the next Y months because ….” 
  • The evidence the employer has that demonstrate those issues, such as current and projected revenue or productivity figures?
  • What does the old and new employee structure look like under the restructuring proposal? For example, are other roles proposed to be removed? Who will undertake the employee’s existing role (if the duties under it are still required by the employer)?
  • How would removing the employee’s role help address the issues identified by the employer?
  • Have any options, other than removing the employee’s role, already been considered?
  • Could the employee be redeployed?

In our experience, where employers get this right, it reduces an employee’s disquiet and, consequently, the likelihood of an employment relationship issue arising.  It also helps employers make better decisions, more accurately identifying what changes are actually needed and how best to implement them.

Finally, there are some limits on the information employers are required to provide employees.  For example, information which would breach the Privacy Act 1993 or commercially sensitive material, the disclosure of which would unreasonably prejudice the employer’s commercial position.

In these cases, certain information may need to be redacted, before being provided to the employee or, in some circumstances, there may be grounds to withhold particular information altogether.  We recommend however that employer gets advice before doing so.  It is not enough for an employer to simply say they believe withholding information is necessary.  That decision can also be scrutinised and will need to “stack up”.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist you with your employment matters. Please feel free to contact Hannah Carey at hannahcarey@parryfield.com or Carly Armstrongcarlyarmstrong@parryfield.com

What should the agreement cover?  

In the first part on buying or selling a business here we saw there were some big picture things you need to think about when buying a business.  This part will look at what the agreement for sale and purchase should cover and some key things that need to be thought through.  While written from the point of view of a Purchaser, it will also raise the same issues that a Seller will need to think through.

Assuming the decision is to purchase the business (rather than the shares of the company – this point was touched on above) then a commonly used template agreement in New Zealand is produced by the Auckland District Law Society.  While it provides a base and a process it can also be adapted to reflect the situation.  In terms of process what usually happens is the agreement gets signed and it is subject to conditions – once those conditions are satisfied it may Just a few examples of the way that it can be customised are:

  • Documents to be supplied: We commonly add in many additional terms which relate to the due diligence discussed above and what records will be provided.  This usually involves a careful discussion with the client to determine what they expect to see and then being clear about what they have.  If you ask for a licence that the seller should have and they cannot provide it, then obviously a red flag goes up.
  • Conditions: These could include the purchaser arranging finance for the purchase by a certain date, being satisfied with the results of the due diligence, having the lease (if there is one) assigned to the purchaser, obtaining consents or licenses needed.  Again, this will vary depending on the business so there is no standard wording that can just be pasted in.
  • Warranties: It is common to include warranties – these are essentially statements by the Seller about the state of the business. For example, a warranty might state that there is no litigation that the company is a party to.  Often these will be subject to robust negotiations – for example, the Seller may want this to say “as far as I am aware” (a knowledge qualifier), or refer to a monetary value such as there being no disputes above “x” dollars (a monetary threshold qualifier).
  • Restraints: It is common to include restraints on the seller of the business – particularly if it were, for example, a catering business or there was potential that they start something new that competes.  Restraints need to be reasonable and usually will involve a certain time period such as one year and there will be a geographic area which is specified.  Again, this can be a point of rigorous negotiations.
  • Intellectual property: Goodwill and reputation often make up a big part of the value of the business which is being purchased so it is important to be clear about what that includes – for example, names (are they trademarked?), website, Facebook pages, client lists, patents or other registrations.
  • Contracts: As part of the due diligence it is important to look at the really key contracts for the business and focus on whether they have change of control provisions and/or the ability to novate or assign to a purchaser.  It might be that there will be issues with the purchaser taking on contracts so that is important to find out as quickly as possible.
  • Tax and accounting: We always advise involving an accountant to assist with these aspects and confirming with them the tax position – for example, that the transfer will be free of GST.  Most of the time both entities will be registered for GST and no GST will be charged but it is far better to get this clear from the start than needing to have a last minute panic.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

In the last few months we have been helping several people as they purchase businesses.  At the same time there have been other clients who are selling their business.  It seems like for both sets of people there are some basic questions that they always have.  This article tries to answer and clarify with some answers to some of the common points regarding the usual process involved and what documentation is required.  A part 2 then deals with what the agreement for sale and purchase would normally cover. While this is written from the point of view of a Purchaser, it will also raise the same issues that a Seller will need to think through.

So, what are you actually buying?

One of the first things to think about is what you are actually buying.  This can be confusing but think about it this way – are you buying the assets of the company, or the company itself?  It is very common in New Zealand to simply purchase the assets and the business rather than the company.  This is because if you buy the shares of the company then you are stepping into the shoes of that company – which means you get what it owns but you also could get what it owes.  So the key here is to be clear about what you actually want and the usual advice would be that purchasing the business and assets is best.  Having said that, there may be reasons why purchasing the shares of a company is necessary and you actually want to take on board all that it has – including licenses and registrations – so every situation needs to be thought through.

Due diligence

It is one thing to see an opportunity and have some chats with the founder of a business about how great it is going.  It is quite another to do extensive due diligence and satisfy yourself that everything is as claimed.  A good due diligence process will bring to light anything which you need to be aware of as a purchaser.  For example, the founder may have told you that they have both great suppliers and customers – is that all verbal agreements or are there robust agreements in place which specify how those relationships are governed?  What licenses are in place – or not in place?  What disputes are there or litigation or potential claims?  What do the accounts reveal?  Is the lease about to expire?  How about relationships with employees?

What does a due diligence involve?

A good due diligence process will see the Seller provide access to all the key documents of the business so you can thoroughly examine them.  This will likely involve advisers such as accountants and lawyers to look through documents.  If you are considering selling a business then the counterpoint here is to keep good records.  How many times have I been involved in due diligences where the Seller has no records of decisions or no contracts in place?  Far too many times – a Purchaser will be scared off if you cannot show clean records and processes.  And if you are a start-up, begin keeping good records right from the start, it will make it far easier to get investors or sell out later on.

Other things to thing about…

There are many other points which we could cover and some hints are: Which employees will come over?  What are the actual assets?  Is the price sensible when looking at the accounts?  Given the industry is there any potential for large claims or liability?  What is the goodwill actually worth?  Is there a reason they want to sell now?  What future changes  might there be in the industry that will affect the business?

Conclusion

We hope this is a helpful overview of some of the things to think about when buying – or selling – a business.  In part 2 we will look at what the agreement for sale and purchase should cover. In fact the issues and things that need to be thought through will be the same no matter how many zeros there are on the end of the purchase price.  The key thing is to remember that every transaction will be unique and so it is important to take a customised approach to what you ask for in the agreement, whether you are a buyer or seller.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.