Purchasing a business

Buying a business in Australia is a lucrative affair. While it may be an exciting time and carries a lot of potential for real financial freedom and success, the affair might get messy if you are in the dark about the corresponding laws that come with it.

When you are buying a business, it is always important to understand the type of business it is and the corresponding assets that will be a part of the purchase or sale. It is very important to identify which assets will be included and excluded from the sale. For licensed businesses, the assets might include any supply or service contracts, intellectual property, furniture, goodwill, the lease, stock, licenses, plant and equipment.

There are legal issues that you have to remember whenever you plan on buying a licensed business like:

Asset value

Assets depreciate in value over a course of time, primarily because they were purchased at different times. Usually, the buyer and seller have conflicting interests in the terms of the value of the assets that are depreciable. Hence, it is a good idea to consider recorded values to the completion date.

Due diligence

One other consideration that you have to make is whether there will be a clause in the contract that will allow the buyer to conduct their own investigations of the business and rescind the contract for a set timeframe if they are not satisfied with the results of the investigation. When this happens, the seller retains an agreed amount.

Freehold ownership

You need to inquire whether the freehold is being sold or not. If yes, is it being held by a separate entity to the business? This should be made very obvious on the contract. The buyer should buy the business and freehold one at a time and under different identities to enhance tax planning and asset protection.

License transfers

When you are about to purchase or sell a licensed business, one of the most important concerns is the transfer of the licences. The contract should state the time and examine any protestation that might come up.

What to do before you sign a contract?

By following these tips below, you will be able to manage the risk of buying a business:

Ensure the seller gives you the contract of sale, a lease copy and a Section 52 statement, which is also known as the Vendor’s Statement.

  • Check if a performance clause can be placed within the agreement or contract that states the least takings of the business over a suitable time span, thereby leading up to the settlement.
  • Check the financial records very carefully and make the transfer of important current contracts to be a clause of sale.
  • Structure the payment method in stages. You can retain some part of the purchase price for a certain period of time
  • Ensure that any representation made up the seller, whether in written or anything else, is guaranteed by the seller as correct and put as a condition in the contract.
  • Insert a restraint of trade clause in the contract. This will prevent the seller from opening a business similar to yours nearby for many years.

Things to watch out for

Here are some issues that you need to look out for:

Failure to disclose information

You should be wary of a seller who is hesitating to disclose important information like what were they selling and other information about the staff, permits, the lease, etc.

Poor business performances

You should be careful of sellers who are subject to pending litigation, talk up the cash trading, has a record of customer complaints, or simply dropping the sale of their products to bounce up total gross sales before selling the business.

Bad behaviour of the seller

You need to watch out for sellers who will not introduce you to the estate agent, suppliers and landlord, won’t allow a trial period, make the deal sound too good to be true, give in too easily to an offer proposed by you, or in a hurry to close the deal quickly.

Other external issues

You should always look out for a business that own rights over intellectual properties like copyright, leaseholders who offer you the business at a reduced price and offer the same at a premium later, landlords who give short leases only, etc.

The Australian Government and the state government exist to protect the community, the environment and the consumers. At the same time, they aim to promote healthy competition and fair trading opportunities. If you are looking for assistance in preparing the necessary legal documents or facing legal issues with the selling party, contact us and speak with one of our highly-experienced lawyers.

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