Most New Zealand business owners sell once. That inexperience, against a buyer who may have done it several times, is the structural disadvantage in the transaction — and it is largely fixed by preparation rather than by negotiation skill.
What buyers actually pay for
Small business valuation usually starts from a multiple of normalised earnings — commonly expressed as EBITDA or as earnings before proprietor’s remuneration for owner-operated businesses.
Normalisation is where much of the negotiation happens. It adjusts reported profit for things a new owner would not incur or would incur differently: an above-market or below-market owner’s salary, private expenses run through the business, one-off costs, related-party rent that is not at market.
The multiple then reflects risk. The factors that move it are predictable:
- Owner dependence. A business that cannot operate without you is worth substantially less, because the buyer is purchasing a job rather than an asset.
- Customer concentration. One customer at 40 percent of revenue is a discount, not a strength.
- Contracted or recurring revenue versus transactional revenue.
- Quality of records. Buyers discount uncertainty, and messy accounts create uncertainty.
- Transferability of key relationships, contracts, leases and licences.
- Staff depth below the owner.
Asset sale or share sale
This distinction drives the tax and risk outcome for both sides, and the parties’ interests usually conflict.
Asset sale. The buyer acquires specified assets — plant, stock, goodwill, contracts — and generally leaves liabilities behind. Buyers prefer this because they take known assets without inheriting unknown history.
For the seller it can trigger depreciation recovery on plant, tax on trading stock, and GST considerations. The purchase price allocation between asset classes affects both parties’ tax positions and must now be agreed and applied consistently — it is no longer something each side can treat differently.
Share sale. The buyer acquires the company, and with it everything including liabilities and history. Sellers usually prefer this because it is a clean exit and the proceeds are frequently capital in nature.
Buyers require much deeper due diligence and extensive warranties in a share sale, because they are inheriting the past.
Which structure applies is a negotiation, and the price should reflect it. A price agreed without settling structure is not an agreed price.
Warranties, indemnities and earn-outs
Warranties are statements about the business the seller stands behind. Breach gives the buyer a claim. Negotiation focuses on scope, on the disclosure schedule that qualifies them, and on caps and time limits.
Indemnities cover specific identified risks — a known tax question, pending litigation — on a pound-for-pound basis.
Earn-outs tie part of the price to future performance. They bridge a valuation gap and they generate a high proportion of post-sale disputes, because the seller no longer controls the business generating the number. If you agree one, define the measure precisely, and address what happens if the buyer changes how the business operates.
Restraint of trade will be required. Expect it, and negotiate duration and geography to what is genuinely necessary.
Preparation should start years out
The value-adding work is slow:
- Reduce owner dependence — document processes, delegate relationships, build a second tier. This is the single largest value lever and takes the longest.
- Clean up the accounts. Two to three years of statements that reflect the business as it will be sold, without private expenses running through.
- Diversify customers where concentration is high.
- Formalise contracts — customer agreements, supplier terms, employment agreements, leases with adequate remaining term and transferable on assignment.
- Resolve outstanding issues — disputes, unresolved tax positions, undocumented related-party arrangements.
- Sort the IP. Confirm the business owns its brand, domain, customer data and any developed systems.
Process
Expect confidentiality agreements, an information memorandum, buyer due diligence, a conditional agreement, and a settlement with a transition period.
Confidentiality matters commercially. Staff, customers and suppliers learning about a sale through rumour damages the thing being sold.
Get tax advice on structure before agreeing terms rather than after. The difference between structures can be a large proportion of the proceeds, and it is not renegotiable once heads of agreement are signed.
business.govt.nz publishes guidance on selling a business, and the Companies Office and Inland Revenue publish material on the mechanics. For a transaction of any size, experienced legal and accounting advice is not optional.
General information only, not legal or tax advice.
