Key Considerations in Buying or Selling a Business

Commercial

The process of buying or selling a business can be quite complex and any party seeking to do so should take into account a range of considerations to ensure the process is as smooth and stress-free as possible. We have highlighted below our list of factors any vendor or purchaser should consider from the outset:

  1. Determining the purchase price

A business may be valued in a number of ways, and we recommend parties get in touch with their own accountants to help them determine the value of the business. Businesses are usually valued with reference to factors such as annual turnover, the value of the assets of the business and the goodwill of the business. The parties may also consider other factors such as earnings before interest, taxes, depreciation and amortisation (EBITDA). The value of any stock (including any stock in hand or stock on consignment) may be either included in, or payable on top of, the purchase price.

  1. How is payment to be made?

Ordinarily, the purchaser will pay a deposit (commonly 10%) upon the exchange of contracts, and the balance on settlement of the contract.

Alternatively, the parties may negotiate a vendor-finance arrangement whereby the purchaser pays off the balance of payment in instalments over time. This is treated as a loan from the vendor to the purchaser. This however carries with it a lot of risk for the vendor as they will have handed over the business without having taken full payment. If a vendor-finance arrangement is considered, professional advice is required about how the transaction should be structured to ensure sufficient protection is provided.

  1. Security Interests over Assets

It would be prudent for the purchaser to check if any assets of the business being transferred during the sale have a registered interest on the PPSR by a third party. Ordinarily a security interest will be registered over the assets over a business as security for a loan or supply agreement. Any such encumbrances should be removed on or before settlement, so that the vendor is released from its debt to the third party and so that the purchaser receives full title of the business and its assets.

  1. Consent of contracted third parties, removal of guarantees

Before selling their business, vendors need to be aware of any obligations they may owe towards any third party with which the vendor has entered into an agreement, such as a lease, supply agreement, or a franchise agreement. Contracts will ordinarily require such agreements to be transferred over (either by assignment or by novation – refer to our article here for an explanation of the difference between the two). It is important this is dealt with so that the vendor is released from liability and to facilitate the purchaser carrying on the business. It would be prudent for both parties to review these agreements and consider the conditions of the third party’s consent to the transfer of such agreements.

It would also be prudent for the vendor to check if any of these agreements contain personal guarantees and take care to ensure any personal guarantors are released from liability upon settlement of the business sale. If a vendor fails to extinguish any guarantees that were agreed upon during the time they owned the business, the vendor’s guarantors may become liable for the actions of the purchaser.

With respect to any leases, the purchaser should take note if the lease grants the tenant an option to renew the lease or to purchase the property.

  1. Is GST payable?

Tax may affect the purchaser’s decision to buy or sell a business and it would be prudent for the parties to consider if the business is to be sold as a ‘going concern’. A sale of business will be treated as the sale of a going concern if the following criteria apply:

  • The purchaser is registered for GST;
  • The vendor and purchaser have agreed that the sale is of a going concern;
  • The vendor makes sure the business continues operation until the settlement date; and
  • The vendor transfers to the purchaser the inclusions necessary for the business to continue its operations on a daily basis.

If the business cannot be treated as a going concern, GST will be payable pursuant to the sale of the business. Therefore, a purchaser should seek to reach an agreement in the sale contract for the vendor to pay for GST if the business is not trading.

  1. Stock

Ordinarily, the parties will need to conduct a stocktake on or before settlement of the contract. Alternatively, the parties may alternatively agree to proceed on a ‘walk in walk out’ basis whereby the purchaser conducts an inspection of the business premises and accepts all stock of the business located on the premises as is.

  1. Inclusions

It is prudent for the purchaser to know exactly what items will be included in the sale of business, so they are aware of what to organise after settlement. The right title and interest in the following are commonly transferred over contemporaneously with the sale of the business:

  • any business name for the business;
  • if able to be transferred, any license relevant to the trade of the business (e.g. liquor license);
  • any website/domain, email addresses, social media accounts, phone numbers relating to the business; and
  • any IT systems and accounts or databases used to operate and manage the business or otherwise containing details of the business’ clients, customers, suppliers, and other contacts.

It is important that the parties clarify what is or isn’t included in the sale of the business and reflect this in the contract.

  1. Employees

The purchaser should inquire with the vendor about the employees of the business and ascertain the employee(s) roles and applicable entitlements. The purchaser should be aware if they are purchasing the business and taking on its existing employees, it will also be responsible for the employees annual, long service leave and personal leave entitlements moving forward and should accordingly press for an adjustment of the purchase price.

  1. Restraints

When buying a business, a purchaser will need to consider whether to include a restraint clause into the contract. This serves to deter the vendor from setting up a competing business nearby, attempting to solicit or entice away the employees or the customers/clients or suppliers of the business, or leaking confidential information (such as trade secrets) or intellectual IP of the business. This is important to protect the purchaser’s investment.

Restraints need to be carefully drafted to ensure they are enforceable and sufficient to protect the purchaser’s interests.

  1. Due Diligence

The purchaser should also thoroughly conduct its due diligence both before entering into the contract and certainly before settlement. Important considerations (which are matters for the vendor to also keep in mind) include:

  • does the vendor have the right title and interest in the business (i.e., the right to sell the business)?
  • does the vendor have the beneficial interest of all agreements which are supposed to be assigned/novated on settlement?
  • has the vendor disposed of any plant and equipment that is supposed to be included in the sale?
  • is the plant and equipment is in a state of good repair and fit for purpose?
  • is there an agency agreement in place?
  • is either party insolvent?

We can help!

Obtaining legal advice before making the decision to buy or sell a business can be crucial to limit exposure to risk and to protect your commercial interests.

Keystone Lawyers have a wealth of experience with the purchase or sale of businesses, and can assist you with initial advice, conducting due diligence, the drafting and negotiation of contracts, and effecting settlement of the Contract. If you require further information, please don’t hesitate to contact our office.

 

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