Purchasing a business is one of the riskiest investments you can make, yet it often receives less scrutiny than it deserves. Before diving in, it’s essential to seek business purchase legal advice early in the process. However, there are critical steps you can take yourself beforehand. If you’re buying a business in Sydney and need business purchase legal advice, feel free to reach out to us here.
Don’t rush the process
One of the biggest mistakes people make is rushing to buy a business. There’s usually no need to make any binding commitments without taking your time to thoroughly evaluate the opportunity. Buyers who commit too quickly often regret it later.
Consider asking yourself the following questions before proceeding:
- What exactly am I buying? Do I understand all aspects of the business?
- How much do I actually know about the business, beyond what I’ve been told?
- Have I set up the appropriate entity to purchase the business?
- Are there employees involved, and will they need to be transferred?
- Is there a lease in place, and what obligations come with it?
- Do I need a restraint of trade clause?
- Will I be asked to provide personal guarantees?
- Do I have a term sheet outlining the key terms of the transaction?
What are you actually buying?
There is a significant difference between purchasing a company and purchasing a business. In Australia, businesses can be bought in two primary ways: purchasing the “goodwill and assets” or acquiring shares in a company that holds the business.
It’s essential to understand the nature of the transaction because each option comes with its own legal implications. Generally, purchasing the business itself, rather than shares, is the preferred approach for most buyers unless there are specific reasons to do otherwise.
Additionally, if you’re purchasing a franchise or licence, such as a McDonald’s franchise or intellectual property rights, the consent of the franchisor or licensor will be required.
Due diligence: what do you really know?
Australian law doesn’t require the seller to disclose much information, so it’s up to the buyer to ask the right questions. Due diligence is the process of thoroughly investigating the business before committing to the purchase.
Typically, both parties will sign a confidentiality agreement, after which the seller provides the buyer with essential information about the business.
You can never conduct too much due diligence. Here’s what you should obtain before committing:
- Financial statements from the last three years, preferably prepared by an accountant.
- A schedule of employees, including tenure, leave balances, and employment contracts.
- The lease for the business premises, if applicable.
- Any ongoing contracts (e.g. equipment leases).
- A list of all assets, including those under finance agreements.
- A schedule of intellectual property, including trademarks and certificates of registration.
A solicitor can also conduct various searches, such as a Personal Property Securities Register (PPSR) search, to ensure that the business is free from any encumbrances. Missing a PPSR charge could result in a buyer facing claims from the seller’s creditors after the sale.
Always ensure that any verbal promises made by the seller are put in writing as part of the contract.
Selecting the best legal structure for your business purchase
In many cases, it’s advisable to buy a business through a new company. Depending on your situation, you may hold the shares of this company either personally or through a family trust.
Safeguarding intellectual property and business identity
Intellectual property is often a vital asset for any business. Make sure any registered trademarks, business names, and trade secrets are clearly identified and included in the terms of sale.
Managing employee transfers in a business sale
If employees are to be transferred with the business, it’s important to understand your options. Knowing the employment status of each worker will help you negotiate the purchase price, especially when dealing with leave entitlements.
Recognising prior service is another key decision, as it has implications for matters such as unfair dismissal, redundancy, and other employment entitlements.
Business premises and lease transfer
If the business operates from leased premises, the sale cannot proceed without the landlord’s consent to transfer the lease to you. Additionally, you may be required to replace the seller’s bank guarantee or bond, which could add to your financial outlay.
Protecting your business post-sale
A lot of a business’s goodwill can be tied to the individual running it at the time of sale. A restraint of trade clause helps to protect your investment by restricting the seller’s ability to immediately start a new business that competes with the one you’ve just purchased. This gives you the time needed to establish your own goodwill post-sale.
If the seller is already bound by a restraint of trade, be sure to obtain an assignment of those restrictions.
Understanding the risks of personal guarantees
Avoid giving personal guarantees where possible. If a personal guarantee is necessary, make sure you understand the potential risks and consequences.
Transferring control of social media assets
Social media is an integral part of many businesses today. Ensure that control of all relevant social media accounts is transferred as part of the sale.
Clarifying key terms with a term sheet
A term sheet can be an effective tool for outlining the key terms of the transaction before the formal sale contract is drafted. While not legally binding in most cases, it helps the parties identify any significant differences early on.
Conclusion
This list is by no means exhaustive, but it highlights key considerations when purchasing a business. Addressing these issues upfront can reduce your overall legal costs. Once you’ve completed the preliminary steps, it’s crucial to engage an experienced solicitor for business purchase legal advice to review or draft the contract of sale and negotiate the final terms on your behalf.
Please note that as of 1 July 2016, the NSW Government abolished stamp duty on the purchase of business goodwill, potentially reducing the costs associated with your transaction.
Business lawyers for buying a business in Sydney
Our experienced business lawyers, based in Sydney, handle numerous business sales and purchases. Whether you’re looking to acquire or sell a business, we provide expert legal advice. While our team is located in Sydney, we offer services across Australia and can assist with transactions on a national level.
