Preparing to buy or sell a business can be an exciting yet stressful time. For many businesses, stock represents one of the largest components of the transaction, so it’s essential to enter into the process with a clear understanding of what this means and how it impacts the overall purchase price of a business.
When parties enter into an agreement using the ADLS Agreement for Sale and Purchase of a Business, the contract outlines a purchase price allocation. This includes:
- Tangible assets;
- Intangible assets; and
- An estimate for stock in trade.
The estimated stock value reflects the vendor’s assessment of the in-store stock as of the date the agreement is signed.
Maximum Stock Percentage Value
On the front page of the ADLS Agreement, you will also find a section for the ‘maximum stock percentage value.’ This clause sets a limit on how much the actual stock value can exceed the estimated stock value before additional steps are triggered. It’s a safeguard to protect both parties from unexpected discrepancies in stock valuation.
Actual Stock Value
The actual value of the stock is determined during a stocktake, which usually occurs the night before or the morning of settlement. This can be done jointly by the buyer and seller or outsourced to a professional stocktaking service. Reasonable allowances must be made for obsolete or damaged stock during this process.
What Happens if There’s a Dispute?
If the parties cannot agree on the valuation, or if there is a dispute over the stocktake, either party can issue a written notice requiring the matter to be determined by an independent valuer. The valuer is appointed by the President of the New Zealand Law Society. Once appointed, the valuer’s decision is final and binding.
Exceeding the Estimated Stock Value
If it’s determined that the actual stock value exceeds the estimated value by more than the maximum stock percentage, the purchaser has options:
- They can accept all or part of the excess stock, or
- Nominate which items of stock the vendor should retain to reduce the stock value to within the agreed limit.
Example
If the estimated stock value was $50,000 and the maximum percentage was 10%, the purchaser would be expected to accept stock up to $55,000. If the actual stock value comes in at $60,000, the purchaser can choose to only accept $55,000 worth and ask the vendor to retain $5,000 worth of stock.
NB: If the purchaser does not notify the vendor of their decision within five (5) working days of the stocktake, they are deemed to have accepted all of the stock. Should the purchaser elect not to buy the excess stock, the vendor may retain or dispose of it freely. Doing so will not be considered a breach of the vendor’s restraint of trade obligations.
Settlement Day
While the initial stock figure in the agreement is only an estimate, we strongly recommend exercising caution to ensure you are not left with unwanted excess stock after settlement.
To manage this, each party’s lawyer will typically advise, prior to settlement:
- For the vendor: to retain funds in their firm’s trust account equal to the maximum stock percentage value; or
- For the purchaser: to pay into the firm’s trust account an amount equal to the maximum stock percentage value.
This ensures that any excess stock value can be covered, with any remaining funds refunded to the appropriate party after settlement.
If you are considering buying or selling a business, we encourage you to get in touch with us. We’re here to assist you through the initial steps to ensure a smooth and transparent business transition.
If you are considering buying or selling a business, we encourage you to get in touch with us. We’re here to assist you through the initial steps to ensure a smooth and transparent business transition.