Tips for buy­ing a busi­ness


A pur­chaser signed an Agree­ment for Sale and Pur­chase to buy an IT busi­ness. The busi­ness traded un­der one name and was owned by a com­pany with a sim­i­lar but not iden­ti­cal name.

The pur­chaser agreed to buy the trad­ing name as part of the pur­chase and in­cluded a ba­sic clause to that ef­fect in the Agree­ment for Sale and Pur­chase. They de­cided to set up a new com­pany to own the busi­ness, which re­lated to their fam­ily name and con­tin­ued to trade un­der the pre­vi­ous owner’s trad­ing name.

Two years later, they heard through their net­works that the orig­i­nal seller had set up a new com­pany through the Com­pa­nies Of­fice with a sim­i­lar name to the old com­pany and was pro­vid­ing IT ser­vices in a sim­i­lar sec­tor of the mar­ket. The clause in the agree­ment re­gard­ing the trad­ing name was very nar­row and did not cover any fu­ture use of the com­pany name or the use of any names sim­i­lar to the trad­ing name.

Cus­tomers were start­ing to get con­fused as to which busi­ness was which and whether the busi­nesses were con­nected. A com­pany name is dif­fer­ent to a trad­ing name. It is very im­por­tant to recog­nise the dif­fer­ence when buy­ing a busi­ness. A com­pany is a le­gal en­tity, which is of­ten used to own a busi­ness. Be­cause they are le­gal en­ti­ties, com­pa­nies can do things like en­ter into con­tracts and bor­row money.

A trad­ing name is the name used for the busi­ness in trade and is the name by which cus­tomers know the busi­ness. It can be a com­pletely dif­fer­ent name from the com­pany that owns the busi­ness.

The trad­ing name is not a le­gal en­tity on its own. When you buy a busi­ness, gen­er­ally you will want to buy the trad­ing name be­cause of the good­will and cus­tomer recog­ni­tion as­so­ci­ated with that name.

Trad­ing names are gen­er­ally sold with a busi­ness as part of the ‘‘in­tan­gi­ble as­sets’’ along with things like cus­tomer data­bases. There are ways to help to pre­vent the sit­u­a­tion above, in­clud­ing:

1. Tak­ing over the ven­dor’s com­pany name or set­ting up a very sim­i­larly named com­pany name when you buy a busi­ness.

2. If you are not tak­ing over the ven­dor’s com­pany name, adding a clause to your Agree­ment for Sale and Pur­chase of a Busi­ness un­der which the ven­dor agrees to change the name of the ex­ist­ing

‘‘When you buy a busi­ness, you will gen­er­ally want to buy the trad­ing name.’’

com­pany; and/or the ven­dor agrees to grant all own­er­ship and rights to use all names and brand names as­so­ci­ated with the busi­ness to the pur­chaser.

3. Pro­tect your trad­ing name and/or com­pany name by ap­ply­ing for a trade­mark for those names. It is im­por­tant to be aware that reg­is­ter­ing a com­pany does not au­to­mat­i­cally give you a trade­mark over that name, and vice versa – they are com­pletely sep­a­rate pro­cesses.

In the sit­u­a­tion of the pur­chaser above, op­tion three was un­for­tu­nately the only op­tion avail­able to them, given set­tle­ment of the trans­ac­tion had al­ready oc­curred. How­ever, it was not guar­an­teed that they would be suc­cess­ful in ob­tain­ing the trade­mark. There are many dif­fer­ent as­pects to a busi­ness pur­chase, and the trad­ing name and pur­chas­ing en­tity are both vi­tally im­por­tant. It is es­sen­tial that you take pro­fes­sional ad­vice be­fore you sign an Agree­ment for Sale and Pur­chase of a Busi­ness, and through­out the process, to make sure you are pro­tected and fully un­der­stand your rights and obli­ga­tions.

Cus­tomers might pre­fer to look for an old busi­ness’ name.

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