Are you considering buying a business? Read our checklist of important topics to consider before you take the next step.
Buying a Business Checklist:The Buyer
Buying a business can be a risky investment. Care must be taken when determining how you will purchase the business (e.g. sole trader, partnership, trust or company). Factors to consider include your own personal liability, asset protection and the costs involved.
Once you receive a copy of the contract (or heads of agreement if the contract is yet to be prepared), we strongly recommend that you obtain legal advice in order to ensure that your interests are protected.
If you are obtaining finance to purchase the business, then it may be possible to make the contract conditional upon loan approval. Likewise, if there is a lease for the business premises, then often contracts are subject to approval by the landlord of the transfer lease. In the event that the business you are purchasing sells food or alcohol, then the contract must be conditional upon the appropriate permits and licences being approved or transferred.
The Purchase Price and Due Diligence
When considering what a fair purchase price may be, it is important that you do your due diligence. Due diligence is the process of assessing the important information in relation to the business. This includes information relating to financial records, operations, legal compliance, liabilities and assets, real estate, intellectual property, taxation, employees, licences, permits and insurance.
Please also take into consideration hidden costs which may be incurred when buying a business. For example, you may be required to pay license fees, legal fees, accounting fees, rent, tax and/or insurance.
We recommend that you obtain legal advice regarding the terms of any lease and any transfer of lease. Important considerations include rent, outgoings, the term, options to renew, permitted use of the premises, repair and maintenance obligations and the owners' corporation (if applicable).
If you do not plan on leasing or buying the business premises, then there may be additional tax implications if the business is not sold as a 'going concern'. If a business is sold as a 'going concern', then this means that the business is being sold with all things that are required for the business to continue operating, and that the business continues in operation until the day of settlement. If the business is not being sold as a going concern, then GST may be payable on the purchase price.
It is important to identify what intellectual property you are purchasing as part of the contract. There may be trademarks, copyright, patents, software, designs or other intellectual property which will need to be transferred. You may be required to assign or transfer licence agreements.
The Personal Property Securities Register ("PPSR") is a national register which records security interests. We recommend that you undertake a search of the PPSR to ensure the assets you are purchasing are not subject to security interests.
Restraints of Trade & Confidentiality
A restraint of trade clause and non-solicitation clause will help to restrict the Vendor from operating a similar business for a certain amount of time within a certain distance, and from soliciting customers, suppliers or referral sources. Restraint of trade clauses can be difficult to enforce, so we therefore recommend that you obtain legal advice regarding such clauses. Always ensure there is a comprehensive confidentiality clause to ensure that the Vendor cannot use confidential information obtained from the business.
If you think you may need some assistance from the Vendor, then you may be able to negotiate an assistance period prior to signing the contract.
The Fair Work Act 2009 (Cth) sets out what entitlements and obligations need to be transferred to the new business owner in relation to employees, including enterprise agreements. You will need to ensure that the Vendor has complied with any such agreements in order to avoid potential disputes.
If employees are not going to be reemployed by you, then the Vendor is required to pay the employee their redundancy entitlements. If you reemploy transferring employees, then you must recognise certain previous entitlements. However, an adjustment can be made at settlement to reduce the purchase price for the amount of employee entitlements being transmitted from the vendor.
Be wary of signing heads of agreements or offers of intent prior to obtaining legal advice, otherwise you may be bound to terms which could be detrimental to you. Always seek accounting, financial and legal advice prior to signing a contract of sale of business.Do not rely on representations made by the vendor or the agent.Ensure everything upon which you agree is in writing and included in the contract of sale.This is a complex area of law and each sale of business transaction needs to be customised.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
Liability limited by a scheme approved under Professional Standards Legislation.
For further information contact
Mitchell is the Managing Principal of our law practice.
He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.