Sale & Purchase - Parry Field Lawyers

If you have a successful business then chances are one way to grow it could be through Franchising.

In this article we want to cover some of the key points that you need to know if you want to head down that path.

Franchising is a good alternative to consider because it can increase your brand recognition and you provide oversight while not actually running the branch. However, you can still benefit from payments and the exposure that a growing brand creates.

So what do you need to consider?

In helping our clients franchise we work closely to look at the following – working through these points below we would then put into a Franchise Agreement and Manual. Your answers will likely depend on the amount of control you want to have over the Franchisee’s business. The Manual will outline the rules and guidelines for operating a Franchisee Business. What you need to think through is the following:

The Territory the Franchisee can act in (eg. Canterbury vs Ashburton)
Opening hours
Advertising
- Who is responsible for doing this
- How will it to be done
- National or regional level?
Training course
- Additional/on-going training?
Number of employees
- Roles – Manager etc.
Minimum sales/performance criteria required for Franchisor to terminate agreement or revise territory
Inventory and supply specifications
Reporting
- How often?
- What form?
Grounds for terminating the Franchise agreement
Restraint of Trade terms (e.g. relating to termination, territory, goodwill etc.)
Insurance cover
Set up
- Conversions/Alterations/renovations required to initially set up premises
- Plans/drawings/specifications of the premises
- Fixtures, fittings etc.
- Initial stock required
- Initial advertising required
- Initial equipment provided by Franchisor
Continuing obligations
- How often will franchisor consult with Franchisee
- How will performance be monitored
- How will records be kept
- Code of Practice? (if member of Franchise Association of New Zealand)
Suppliers/Key Contracts needed
Stationery
Leases
Requirements for where shops are located
Intellectual Property – this will include considering:
- Exactly what the Company has as IP
- Whether trade marks are registered
- How trade marks can be used
- Licenses that may be in place
- Providing clear brand guidelines

Franchising is a definite option for a growing business.

If you would like input on franchising then we would be happy to provide you with input through an initial conversation about what you want to achieve. To discuss this or for further enquires please contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com

You might also appreciate our guides such as the Doing Business in New Zealand guide and the Start-ups Legal Toolkit. We also provide free templates for resolutions, Non Disclosure Agreements and other resources on our site as well as many articles on key topics you should know about.

Business can be complicated but it doesn’t have to be. We have helped thousands of clients and know about the key legal areas that will affect you and have just released our fully revised and updated “Doing Business in New Zealand” free handbook. You can download it here.

New Zealand consistently ranks as one of the most business-friendly nations in the world. Given this appealing status and the interest we receive both from local and international investors, as well as form businesses and entrepreneurs, we produced the “Doing Business in New Zealand” handbook a few years ago and now have fully updated it. It is intended to introduce and provide information for those who may be unfamiliar with how business is done here. The handbook provides introduction on business structures, investment rules, employment, disputes, property, intellectual property, immigration, privacy and social enterprise, just to name a few examples.

If you have further enquires please contact Steven Moe at stevenmoe@parryfield.com or on 021 761 292 or Kris Morrison at krismorrison@parryfield.com.

Be sure to check out our other free guides too, such as Startups: Legal Toolkit and Social Enterprises in New Zealand: A Legal Handbook. We also provide free templates for resolutions, Non Disclosure Agreements and other resources on our site as well as many articles on key topics you should know about.

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

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.

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 – 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. 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 think 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.

Several months ago we wrote an article on the key changes to the Overseas Investment Act coming into force later in the year (the article can be found here). The Overseas Investment Amendment Bill passed its third reading on Wednesday the 15^th of August and received royal assent on Wednesday the 22nd of August. The changes are expected to come to effect in October 2018.

These are the key changes that you need to be aware of if you are a non-resident foreign buyer hoping to purchase property in New Zealand:

Scope of “sensitive land” to include “residential land”

The biggest change to the Overseas Investment Act is that the scope of “sensitive land” within the overseas investment regime is being broadened to include “residential land”. This is going to make it more difficult for overseas investors to purchase residential land in New Zealand, as they will need to apply for consent from the Overseas Investment Office which will require that the investment is going to, or is likely to, benefit New Zealand.

You will not need to apply for consent if you hold a residence class visa, have been living in New Zealand for at least 12 months, have been present in New Zealand for at least 183 days of those 12 months and are a New Zealand tax resident.

We have also published a more detailed article on the effect of this change, which can be accessed on our website here.

Forestry rights and interests:

The amendment will also impose stricter regulations on the purchase of forestry rights and interests, requiring the application for consent under one of two pathways – the “modified benefits test” or the “special benefits test”.

It should also be noted that it will be the obligation of the purchase to ensure that they are complying with the Overseas Investment Act.

If you would like to have a look at the Overseas Investment Amendment Bill, you can access it here.

If you have any questions or concerns arising out of this article, please feel free to get in touch. This article is not a substitute for legal advice and you should talk to your lawyer about your specific situation.

Kris Morrison – krismorrison@parryfield.com

Paul Owens – paulowens@parryfield.com

Consequential loss is a loss that arises as a result of a breach of contract. In contracts, parties often exclude liability for consequential loss which is provided for in an exclusion clause.

If you are entering into negotiations for a contract, it is important that you understand what consequential loss is, when damages can be claimed for consequential loss, and how to effectively exclude liability.

A question that arises when dealing with consequential loss is how far you can actually go in claiming damages for a consequential loss? Where do you draw the line?

Say, for example, that Mrs Smith has purchased a freezer for her catering business from Mr Jones, which she has filled with ice cream. This ice cream is for a stall that she has been running at the local fair for a few years now, and is a favourite for many fair-goers. Unfortunately, the freezer broke the day before the fair causing all of the ice cream to melt and meaning that Mrs Smith cannot serve ice cream at her ice cream stall and would therefore not make any profit. The lack of ice cream at the stall meant that there were a lot of grumpy children, and grumpy children meant grumpy parents which resulted in a lot of backlash on the fair.

The following year, the fair suffered a 50% reduction in attendance as a direct result of the grumpy children and the lack of ice cream, and the organisers then had to cancel the fair in subsequent years and claimed the amounts they lost from poor Mrs Smith.

Mrs Smith now wants to sue Mr Jones in damages for the loss of profit and the amounts claimed by the fair organisers, which were losses resulting from the breaking of the freezer. But how far can Mrs Jones actually go in claiming these damages? Let’s look at some cases and see what they say.

Hadley v Baxendale

In an 1854 English Court of Exchequer decision Hadley v Baxendale, Alderson B famously established the remoteness test, which is a two-limb approach where the losses must be:

Considered to have arisen naturally (according to the usual course of things); or
Reasonably considered to have been in the contemplation of the parties at the time when they made the contract as a probable result of the breach of it.

Alderson B said that in order for a party to successfully claim damages on the grounds of consequential loss, the loss must fall into either of those two categories.

McElroy Milne v Commercial Electronics

In 1992 in New Zealand, Cooke P said this test no longer applied in modern law, and he established a multi-factorial discretionary approach in which a range of factors are to be taken into consideration, including foreseeability.

Transfield Shipping v Mercator Shipping (The Achilleas)

This is more recent English House of Lords decision concerning the late return of a ship. In this case, the judges established that while Hadley v Baxendale is generally a good approach, there are certain circumstances where it may not necessarily apply.

These judgments create confusion in determining what actually constitutes a consequential loss and where to draw the line. Generally speaking, however, the loss must have been in the contemplation of the parties for it to amount to a consequential loss.

A way forward: What should the clause say?

In our view there are three ways forward:

No exclusion of consequential loss – this means that the parties are leaving it up to the interpretation of the Courts;
Include a general consequential loss clause; or
Incorporate a bespoke clause for the specific contract.

Where possible, we recommend a general exclusion of consequential loss with some examples of specific situations (essentially a bit of both 2 and 3 above).

Other options available:

Remember that a contract is ultimately a give and take from each side and another way that a party can limit liability in a contract is by putting a total cap on their liability.

Another option is that a party could limit liability by stating a time period in which the other party can bring a claim. A small company negotiating with a large multinational will have less scope and a template agreement is much more difficult to get changes made to it.

Ultimately, whichever route is taken depends on the preference of the parties, and their negotiations will also play a role in determining what liability is excluded.

Every situation is unique and how much Mrs Smith could claim for will depend on what the contract said and the circumstances of the situation. Whatever your scenario, we have a dedicated commercial team at Parry Field Lawyers who can give you personalised advice on all aspects of your business ventures. This article is also based on a more detailed analysis of the cases mentioned above – contact us if you would like a free copy of that.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Kris Morrison or Steven Moe at Parry Field Lawyers (348-8480).

The IRD has just issued some new guidance on cyrptocurrency here (end of March, 2018). It is interesting to think about traditional Government and how it responds to something new like blockchain and its currently most well known child, cryptocurrency. The key takeaways are the following points they make which for the first time make clear the regulatory environment that they are wanting people to be operating within (these are direct quotes from their Q&A statement):

cryptocurrency is property, not currency.
Cryptocurrency received as payment for goods or services is business income, which is taxable.
This is seen as a barter transaction and you’ll need to calculate the value of the cryptocurrency in New Zealand Dollars (NZD) at the time it’s received.
For some ‘alt coins’ (cryptocurrency other than Bitcoin) it may be necessary to convert into US dollars, or any other fiat currency, and then convert into NZD.
Rates can vary significantly between different exchanges and currencies. You must use a consistent exchange and conversion approach.
Where you acquire cryptocurrency for the purpose of disposal (selling or exchanging it) the proceeds you make from selling it are taxable.
For income tax purposes, cryptocurrencies also have similar characteristics to gold bullion.

The IRD had issued some previous guidance before but some of the points here had not been clear. This guidance indicates that in New Zealand they want to be capturing the value created from the ownership of any cryptocurrency. Doing that may involve some hurdles to calculate what those values actually will be in New Zealand dollars to report on (eg on a sale calculate Alt coin value -> USD value -> NZD value -> pay tax on that).

The other interesting aspect is if you are receiving payment for goods and services that is to be treated as taxable business income. What are the flow on impacts of such a regulatory environment in terms of impact on small players who are planning to use a cryptocurrency for small scale projects and as a way to transfer value for someone providing a service, or someone selling some goods. On an initial reflection about this it means, for example, if I grow organic vegetables in my back garden and receive cryptocurrency in exchange for them from a third party that when I sell them like that then that cryptocurrency is business income that I need to pay tax on. It adds a layer of complexity perhaps once a regulatory body like the IRD gets involved in what could have been a seamless exchange of cryptocurrency for the exchange of goods or services. It will be important to keep an eye out and watch how this all develops.

There has certainly been a lot of buzz recently about crypto-currencies, Bitcoin, Blockchain and the opportunities they represent. Having done a lot of reading on this subject we thought it would be helpful to give an overview about them and, more importantly, what sits behind them that is so disruptive. We have also set out below links to the articles and commentary that we have found the most useful in this area.

What are they?

Cryptocurrencies are a potential disruptor to the traditional ways of thinking about money. They are probably best described as ‘tokens’ that exist in digital form and are traded via online exchanges. The most famous at present is Bitcoin due to its surges in price recently. In some ways it is like the heady days of old when gold rushes would sweep through and tales of vast wealth being found on the side of a river. In this case, the most prominent story stems from the fact that in April 2013 the Winklevoss twins (who got a settlement from Mark Zuckerberg as they claimed he stole the idea for Facebook from them) – bought $11 million dollars of Bitcoin (at $120 per coin). Do the math quickly and that makes them now Bitcoin billionaires.

What is going on now and why all this sudden interest?

There is a huge element of FOMO involved here (fear of missing out) and the reality is large volatility is seen with huge price fluctuations, delays in transactions being processed and rumours of hacking. All this in an environment where no one country has issued this new form of currency – that gets around some issues but creates others such as who stands behind it. There is a lot of talk about it being a classic bubble that will one day burst – but no one knows when that may happen and in the meantime millions more investors are getting in on this due to the seemingly endless rises of hundreds of percent. What is going to happen? If I knew I wouldn’t be writing this article! But be wary of anyone who looks to make a quick gain without the usual hard work. That can happen but more often than not it is the owners of the grocery stores that sold the products to the gold miners who actually made money.

How does The Blockchain fit in?

Underlying the different cryptocurrencies (Bitcoin is just the most famous) is the real disruptor – the Blockchain. This is a technology that allows cryptocurrencies to exist. It acts as a decentralised ledger (so no government controls it) on a network – so changes made to it are public and viewable. So a transaction begins by being requested and once it is validated it is a new “block” which gets added to the blockchain. The real point of interest is how the Blockchain can be used in other areas e.g. contracts, health care, energy, home ownership, voting etc.

This 6 minute video helps to explain it, or this shorter one.

This is all new and disruptive, do I still need to comply with “old world” rules on securities?

Yes. The FMA has issued guidance about this (see below) and it is worth talking through with your adviser before you set yourself up as a provider of services relating to crypto-currencies. It may be disruption but there are still implications of trading Bitcoin or other currencies.

I want to know more – where do I go?

For those who do want to dive deeper we recommend you have a look at the following resources online by clicking on the links below – is there something we have left out? Email me at stevenmoe@parryfield.com and we can add more in.

• The New Zealand Financial Markets Authority has released this guidance on crypto-currencies and initial coin offerings.

• This commentary has just been released by the SEC in the United States and offers a very helpful overview as well as some questions investors should ask when buying a crypto-currency

• Reserve Bank of New Zealand commentary

• Report by PwC

We have been helping a number of people with their questions about Bitcoin and crypto-currencies and the Blockchain. Let us know if you would like to discuss.

Steven Moe

03 348 8480
stevenmoe@parryfield.com

So, what are you actually buying?

Due diligence …

What does a due diligence involve?

Other things to think about…

Conclusion

Hadley v Baxendale

McElroy Milne v Commercial Electronics

Transfield Shipping v Mercator Shipping (The Achilleas)

A way forward: What should the clause say?

Christchurch CBD

Christchurch

Rolleston

Hokitika