Navigating the Sale of a Business
20 October 2024

Some Key Considerations

Selling your business involves many steps, from evaluating assets to securing necessary consents. This article explores some of the key aspects of selling a business, focusing on tangible vs. intangible assets, the role of goodwill and restraint of trade, the importance of landlord consent and lease assignment, and possible tax implications for you. 


Tangible vs. intangible assets 

When selling your business, it’s essential to distinguish between tangible and intangible assets. Tangible assets are physical items that the business owns, such as machinery, equipment, inventory, and real estate. These assets are relatively straightforward to value because they have a clear market price and can be sold independently. 


Intangible assets, on the other hand, do not have a physical presence but are crucial to the business’s value. These include intellectual property (like patents and trade marks), brand reputation, customer lists, and goodwill. Goodwill represents the business’s reputation and customer relationships, which can significantly enhance its value. Unlike tangible assets, intangible assets can be more challenging to quantify, but they are often what makes a business attractive to potential buyers. 


The role of goodwill and restraint of trade 

Goodwill is an important component in the sale of a business. It reflects the value of the business’s brand, customer base, and overall reputation. When a business is sold, the buyer often pays a premium for this goodwill, recognising that it can lead to future profits. 


To protect this investment, buyers typically include a restraint of trade clause in the sale agreement. This clause prevents you, as the seller, from starting a competing business within a specified area and timeframe. The reasoning for this is to ensure that you don’t undermine the value of the goodwill by drawing customers away from the new owner. The restraint of trade must be reasonable in scope and duration to be enforceable, balancing the buyer’s need to protect their investment with your rights to earn a livelihood. 


Landlord consent and lease assignment 

Another crucial aspect of selling a business is dealing with leased premises. If the business operates from a leased property, the lease agreement must be assigned to the new owner. This process requires the landlord’s consent, which is not always straightforward. 


Landlords typically require the new tenant to meet certain criteria, such as financial stability and a good track record. The lease assignment process usually involves providing references for the prospective tenant, evidence of their financial viability, and sometimes paying the landlord’s legal fees. It’s important to review the original lease agreement to understand the specific requirements and ensure that the landlord’s consent is obtained in writing. 


Failure to secure landlord consent can jeopardise the sale, as the new owner may not be able to operate the business from the same location. Therefore, it’s advisable to start this process early and work closely with your legal advisors to navigate any potential hurdles. 


Tax implications 

When selling a business in New Zealand, it's important to understand the tax implications. The tax treatment varies between asset and share sales, with each type of asset potentially being taxed differently. Depreciable assets like machinery may have tax implications related to depreciation recovery, and the sale of goodwill and other intangible assets may have specific tax considerations. Obtaining professional tax and accounting advice early in the sale process can help ensure these assets are correctly valued and reported. 


Additionally, Goods and Services Tax (GST) may apply depending on the sale structure. It’s crucial to determine if the sale is a going concern, as this affects GST treatment. Given the complexity of tax regulations, working with legal and tax professionals is essential to navigate the specific requirements and ensure compliance with all tax laws. 


Understanding, and taking into consideration, these key elements of your business sale can ensure a smooth transition of your business from you to the buyer. We have the expertise to facilitate a successful sale and help you maximise the value of your business. 

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