Buying a Business
Congratulations! So, you have negotiated the terms for the purchase of your new business through a business or commercial agent, or directly with the vendor. There are however, some aspects of your purchase that you really should consider before going further. Importantly, we at Lopich Lawyers can help you with these matters.
Before you go any further, carry out a “due diligence” investigation of the business and of the vendor. It may make the difference between the success or failure of your new business. Find out as much as you can about the business that you are buying and the vendors as you can including:
- for how long the vendor has owned and operated the business;
- why is the business being sold;
- ask to see the financial records of the business for at least the last 3 years;
- inspect (or ask your lawyer or accountant to inspect) those records;
- be extremely cautious if you are told that the business generates a lot of cash which is not reflected in the financial records.
There are also a number of other things for you to consider, including the following:-
- have you considered whether you should be buying the business through a company with or without a supporting trust structure, or as a partnership or sole trader? There are significant legal and tax implications that will follow from the structure you use to set the business up.
- it really is essential that you get expert accounting and tax advice before you set up your business structure. Doing this will help avoid taxation problems in the future and will maximise the benefit to you and your business in the years to come.
- make sure that the purchase price is broken down to show separate values for “goodwill”, “stock” and “equipment” If not, you could be creating tax problems for the future.
- does your business depend on you having the right to use intellectual property owned by a third party? If so, make sure that you are able to secure the transfer of any existing licences or that you will be able to purchase a licence to use that intellectual property.
- does the purchase price include the GST? If the business you are buying includes the transfer of the lease of the premises from which the business is carried on and everything else necessary for you to continue to carry on the enterprise (business), then the transaction may be treated as the sale of a “going concern” for GST purposes. If not, then the purchase is likely to be treated as a “taxable supply”. That means that the GST is payable on the transaction and you may be required to pay 10% GST on top of the purchase price.
- are you purchasing a business with a lease of the premises that it is being operated from? If so, the landlord of the premises is entitled to ask for details of your financial circumstances and evidence of your experience in conducting a business of the type that you are buying. In this way the landlord can be satisfied that you are likely to be a good tenant who has some experience operating a particular type of business. The landlord may be required to “consent” to the transfer or assignment of the current lease to you provided he can be reasonably satisfied about these issues.
- do you intend to employ any of the current employees of the business? If so, it is important that you are aware of the employees’ entitlements to such things as long service and annual holiday leave, their years of service and their employment status (e.g. permanent or casual).
- is there any leased equipment included in the sale of the business? If so, ensure that the leases will transfer to you when you settle the purchase. Alternatively, find out whether the financial institution that owns the equipment requires that you take a new leases of the equipment. You should also find out what the residual value of the equipment is at the time of the sale.
- find out what other equipment is in the premises. Obtain a full list of all the plant and equipment, and if possible, a depreciation schedule for the plant and equipment. Ensure that the equipment is in “working order” and whether there are any manufacturer warranties still in place to ensure that these will transfer to you.
It is usual for the vendor’s solicitor to prepare the Contract for the sale of the business. Ask for the Contract to be sent to you, or your solicitor. Meet with your solicitor to discuss the Contract and to ensure that the Contract reflects everything that you have negotiated with the vendor. At Lopich Lawyers we will explain the Contract you and help you through the whole process.
Also make a point of asking your accountant to check the financial records of the business before you sign the Contract.
Selling a Business
It is common for the vendor (seller) of a business to engage a business or commercial agent to act on the sale of the business in much the same way as the seller of a residential or commercial property engages an agent to sell a house, factory or other commercial premises.
If you are going to sell your business through an agent, use a reputable agent and be sure to negotiate the agent’s fee and any “additional” expenses for advertising, printing and the like before you sign an agency agreement.
It is usual for the vendor’s solicitor to prepare the Contract for the sale of the business. Let your lawyer know that you are planning to sell your business and ask your lawyers what will be needed for the Contract to be prepared.
It will help the transaction to proceed as smoothly as possible if the Contract is prepared early and all necessary documents such as your lease, financial records etc are provided to your lawyers before you find a buyer.
There are many things to consider these few points are by no means above by no means a comprehensive list. Why not speak to one of our lawyers at Lopich Lawyers. We can help you prepare for the sale of your business and make sure that the Contract that is prepared addresses all your needs.