‘It’s The Law’ – Buying a business
With record low interest rates and a predicted boom in the Wimmera from increased investment in renewable energy and mining, now might seem like a good time to invest in a local business.
In this article, I provide an overview of some of the legal considerations which should be considered before contracting to buy a business.
Firstly, ensuring you purchase the business in the most appropriate entity is important. Advice from your solicitor and accountant might help you in deciding whether you buy the business in your sole name, in a partnership, in a company or through a trust arrangement.
It is critically important to ensure the contract is drafted in a suitable manner and that it includes all details that you need to allow you to operate the business profitably.
The assets of the business need to be detailed in the contract carefully to ensure you receive everything you expect.
Some common assets that might form part of the sale include goodwill, equipment, machinery, stock, work-in-progress, business names and intellectual property.
The contract will likely allow for an assistance period in which the seller will work alongside you before or after settlement to introduce you to customers and suppliers and give advice and general assistance as required. The length of this period may be negotiated.
Often the contract will also include a restraint area and period.
This restraint restricts the purchaser from being involved in another business which competes with the business you are purchasing. The size of the area and the length of the restraint may also be negotiated.
The parties will engage in discussions around how any employees involved in the business will be offered employment.
Many readers would be familiar with special conditions being included in residential property sale contracts.
Special conditions in contracts for the purchase of a business can be used to protect you in a similar way. Some special conditions which might be helpful include in relation to obtaining finance for the purchase price, the transfer of business names and due diligence.
Before exchanging contracts your solicitor will likely wish to carry out some searches into the purchaser and the business.
These might include ASIC searches if the purchaser is a company, title searches in relation to the premises the business operates from and searches of the Personal Property Securities Register for registered security interest over the assets of the business such as plant and equipment.
These searches can assist by revealing negative information to you concerning the seller or the business before sale, which might lead you to decide not to purchase the business or to request a reduction in the purchase price.
After the contract is agreed and signed it is important to ensure you comply with its terms including all deadlines.
A deposit of 10 percent of the purchase price will likely be payable upon signing of the contract with the balance of the purchase price payable at settlement.
The balance of the purchase price will be adjusted between the solicitors to reflect the payment of expenses such as council and water rates, wages, annual leave, long-service leave and stock.
Usually you will have the ability to inspect the business in the days preceding settlement.
Settlement is usually straight forward where your solicitor will hand over a cheque for the balance of the adjusted purchase price and is provided with the keys, the business name transfer number and any other relevant documents such as the transfer of lease.
At settlement, full title to the business transfers from the seller to you.
• This column is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. Neither Patrick Smith nor O’Brien & Smith Lawyers accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend you consult your lawyer.