When you purchase a business, you generally purchase the business name, goodwill (including customer base), intellectual property, equipment of the business, contracts relating to the business (such as any leases), as well as the debts of the business. There are certain legal requirements of vendors when selling a business, such as the requirement to receive a Section 52 Statement, of which you should be aware.
If the business is run from premises, it is likely there will be a lease which will need to be transferred to you. This will require the landlord to agree to transfer the lease to you from the vendor. Likewise, if the business is a franchise, you will need to obtain the consent from the franchisor to transfer of the franchise agreement.
Purchasing a business requires “due diligence” to check what you are actually purchasing is consistent with your understanding. Having that there are various factors to consider, refrain from signing any Contract of Sale or offer until you obtain legal advice. We can assist you with carrying out the due diligence and identify any risk areas.
Due diligence
Before making an offer to purchase a business, to assess its value, or at least prior to signing any documents or paying a deposit, will involve amongst other things an assessment of the following:
- What is specifically included in the assets
- Financial records, including previous returns lodged with the ATO
- Any necessary ongoing contracts relating to operation of the business (such as with suppliers and customers)
- Stock accessibility
- Employees
- Business structure (manner of ownership)
- Liabilities of the business (making sure that these are not transferred onto you)
Refer to Valuing a business.
It is good practice to conduct a search of the Personal Property Securities Register (PPSR) to find out if there are any security interests affecting the business or the assets. We can conduct this search on your behalf. Refer to our separate article “Personal Property and Securities Register (PPSR)” (coming soon).
Other considerations are whether the vendor is in default of any important contracts, the lease or franchise agreement (if applicable), or whether there are any court proceedings involving the business and/or the vendor.
Where to start?
Have you considered your business structure? If not, refer to Structuring your business.
Once you have provided us a copy of the formal offer or Contract of Sale and related documents (we will let you know if there are any required) we will review these and prepare an easy to follow advice for you. The advice will guide you through the documents, including whether the purchase price includes stock and if the contract is conditional on you obtaining finance, as well as highlighting any areas of concern.
In some cases, you may be required to provide a personal guarantee under the Contract of Sale or the Transfer of Lease or Franchise Agreement (if applicable). We will advise you regarding the risk in this case.
Negotiating a Contract of Sale
We will outline any recommended changes to be made in order to better protect you and identify any matters for you to be aware. We can then negotiate these changes on your behalf with the vendor’s legal advisors, before you sign the Contract of Sale and pay any deposit.
Settlement of business transaction
The date of transfer of the business is referred to as the settlement or completion date. Prior to the settlement date, the balance purchase price will be adjusted to account for any amounts pre-paid or unpaid by the vendor in respect to the business, including rent and any customer deposits or part payments made to the vendor for services to be provided after settlement. We can prepare these calculations.
We will provide you with a checklist of items to assist you with preparing to take over the business at settlement.
The settlement will take place once all the conditions in the Contract of Sale have been satisfied, including transfer of the lease and franchise agreement (if applicable).
This information is intended as a guide only. For further information, feel free to contact Scott Legal on 03 9111 0073.
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