Buying a Business

What happens to employees when it comes time to sell … or buy

Businesses ranging from corner dairies to the big corporates change hands every day in New Zealand. Each transaction involves a number of contractual obligations between the parties. There are also third parties involved and affected, for example, employees and landlords.

In relation to employees, we recently came across the following situation. The purchaser of a business ‘inherited’ two employees from the vendor. The vendor informed the purchaser that they were ‘casuals’, but the contract did not expressly address their employment status. You can imagine the nasty surprise for the purchaser when, after deciding to make the two ‘casuals’ redundant, found out they had worked in the business for many years and had to be paid significant redundancy and holiday pay.

Good contract drafting can help avoid the implications of this oversight and many others. Senior Lawyer Kirsten Ferguson provides the following five tips relating to a business sale, with a particular focus on the contractual obligations of the parties.

Tip 1: Consider the structure of the transaction
The structure of the sale is important because it affects the obligations transferred to the purchaser upon sale. Broadly speaking, the most common structure (especially for small to medium businesses) is a sale of assets from one party to the other. This type of transaction allows the purchaser to start, more or less, with a ‘clean sheet’.
The alternative, if the business operates as a company, is a sale of the company shares. With a share-sale transaction, the purchaser may take over the debtors and creditors of the business. The purchaser can also inherit other ‘baggage’ including tax liabilities or benefits and employer obligations.

Tip 2: Third parties – Employees
Both vendors and purchasers need to be particularly careful when dealing with employees of a business. Vendors must be aware of their good faith obligations as employers, which require them to demonstrate their efforts to protect the employment of their employees. It is compulsory to have employee protection provisions in all employment agreements and for these to be adhered to during the sale process.
Where a purchaser takes employees with the business, the purchaser must be prepared in advance of the handover date. Preparation usually includes meeting with the employees, providing them with the proposed form of Employment Agreement and giving them the opportunity to take advice about the Agreement.

Tip 3: Other third parties – Landlords/Licensors
If the sale of a business includes the transfer of a lease or licence, both vendor and purchaser need to consider the requirement to obtain consents from third parties (for example, the landlord or licensor).
In most cases, third parties will want to ensure that the purchaser is suitable. The person willing to pay the most money for the business is not always the most suitable from the point of view of the third parties who will be obliged to have a continuing relationship with them. Purchasers should also bear in mind that third parties will require information about their background, relevant experience and, in some instances, referees.

Tip 4: Due Diligence – consideration of all relevant material pre-purchase
Most transactions will include due diligence by the purchaser either before an agreement is reached or as a condition of the purchaser being bound to complete an agreement. It is a good idea to compile a list of the documentation to be provided before due diligence is undertaken. We can provide purchasers and vendors with helpful checklists to assist with this.

Tip 5: Get advice on the whole contract
Going through the detail of the contract helps to focus on the issues and that ensures important details are not overlooked. Avoid breaching contractual arrangements inadvertently simply because you were unaware of obligations contained in the small print.
Remember the devil is in the detail! It is a cliché but it’s true – no two transactions are exactly alike. Obtaining advice prior to ‘signing on the dotted line’ is vital to ensuring that the transaction and transition is as hassle free as both vendor and purchaser would like.


By Kirsten Ferguson
Senior lawyer, Rainey Collins Lawyers
Visit: www.raineycollins.co.nz