Buying a NZ Franchise: Check Stock Before Settlement

When buying an existing franchise in New Zealand, stock can look like a straightforward extra on the purchase price. Yet shelves full of products do not necessarily represent usable value. Before committing, establish exactly which inventory you must buy, how its value will be calculated and who carries the risk if it cannot be sold.

Establish what is included in the purchase

Start by separating the advertised business price from the amount payable for stock. A price described as “plus stock at valuation” leaves part of your purchase cost unsettled until the agreed valuation process is complete.

Ask the seller for a current inventory report showing quantities, product descriptions, unit costs and stock locations. Reconcile this with the draft sale and purchase agreement rather than assuming every item on the premises belongs to the seller.

The list should distinguish between:

• Saleable products owned by the seller.
• Goods held on consignment or otherwise owned by someone else.
• Damaged, expired, discontinued or returned products.
• Packaging, ingredients and other consumables.
• Display samples and promotional items that cannot be sold normally.
• Stock ordered but not yet delivered.

For a franchise resale, also ask the franchisor which existing products will remain authorised for sale after you take over. A product may be physically sound but commercially unsuitable if the brand is withdrawing it. Request details of any planned range changes that could affect the opening inventory.

Test whether the stock is genuinely saleable

A stock list is a starting point, not proof of value. Ask for sales by product and an aged inventory report, then inspect a representative selection of goods. Where records are incomplete, allow more time for physical checking.

Look for slow-moving lines, short shelf lives, damaged packaging and quantities that exceed realistic local demand. In a food business, storage conditions and expiry dates matter. In retail, seasonal products and superseded models may require substantial discounting.

Ask your accountant to compare stock quantities with recent sales. The practical question is not simply “What did the seller pay?” but “How much of this can the business realistically use or sell, and on what terms?”

For example, a large quantity of promotional packaging may have little usefulness if the promotion ends shortly after settlement. Do not accept its original purchase cost automatically as the appropriate transfer value.

Check the franchisor’s requirements too. Must you maintain a particular opening range or stock level? Will you need to buy replacement products immediately? These questions help distinguish useful opening inventory from goods that merely occupy storage space.

Agree the valuation and stocktake process

Have your lawyer document the stock arrangements in the sale and purchase agreement, with your accountant advising on valuation. Avoid relying on an informal understanding that the parties will agree a fair figure later.

The agreement should address:

• Valuation method: which cost records will be used and how discounts, rebates and freight are treated.
• Exclusions: which categories you will not purchase, including agreed treatment of obsolete or expired goods.
• Quantity limits: whether a maximum stock value or other purchasing limit applies.
• Stocktake timing: when counting happens and how trading between the count and settlement is recorded.
• Verification: who attends, who pays for an independent stocktaker and how discrepancies are resolved.
• Incoming orders: who pays for deliveries and whether outstanding orders can be cancelled.

A cap needs clear consequences. If the counted stock exceeds it, must the seller remove the excess, or can you select which items to accept? Make sure the arrangement still allows you to meet the franchise’s opening requirements.

Ask your accountant to confirm the GST treatment of the transaction. Do not assume the stock payment can be treated separately from the wider business sale without checking.

Understand the legal position before paying

New Zealand has no franchise-specific legislation, mandatory statutory franchise disclosure regime or dedicated franchise registration requirement. The franchise community operates under general commercial laws and contractual arrangements.

The Fair Trading Act 1986 prohibits misleading or deceptive conduct and unsubstantiated representations in trade. The Contract and Commercial Law Act 2017 may also be relevant to contractual remedies and the sale of goods. Your lawyer should explain how these laws apply to the particular transaction, including any proposed contracting-out provisions.

Franchisors belonging to the Franchise Association of New Zealand must comply with its Code of Practice, including disclosure requirements. That membership framework does not replace a stock inspection or a properly drafted purchase agreement with the seller.

Practical takeaway: Before signing, agree what stock you will accept, how it will be valued and how the final count will be checked. Pay for useful inventory, not simply everything left on the shelves.