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Buying a business – warranties and tax 17 May 2013

Warranties

Include in your sale and purchase agreement as many assurances from the vendor as you can. Examples include:

  • The business will continue to operate at the same level as it was at the time of sale. This may help cover you if the vendor knows a chunk of the business will disappear as soon as there’s a change of owner.
  • No suppliers will refuse to deal with the new owner. Some suppliers like to limit their outlets and might take the opportunity to stop supply.
  • Have all bylaws, licences etc been complied with and are they up to date?
  • All agreements can be transferred to you.

The owner doesn’t own any other business. If another business is owned, the income or expenses could be distorted, for example by sales income going into the wrong account, or some costs might have been paid by

  • another business entity.
  • There are no ACC issues.

Ask your lawyer for any more warranties to add to this list.

Tax

Split the purchase price in your agreement with the seller into:

1. Stock and partly completed work at valuation

2. Plant and equipment etc

3. Goodwill.

  Now split up the plant and equipment and put a market value on each item. Get these details included in the agreement. This will reduce the risk of Inland Revenue challenging the prices you’ve used.

There’s no tax deduction for goodwill so you should have items 1 and 2 fully valued. The vendor has an interest in making these as low as possible because the sale of goodwill is a capital gain and they might be able to claim a tax deduction for loss on sale of the equipment. You might have to negotiate.

  • Check on staff issues and who pays holiday pay. Buyers can’t get a tax deduction for the holiday pay owing to staff by the vendor. The vendor claims this cost.
  • If the purchase includes real estate, it might pay to hold this in a separate entity from the business.

 

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