Manage the risks when opportunity presents.
Buying or selling a business is a serious step.
Even for the commercially savvy, every sale or purchase of a business heralds opportunity and risk. Cautiously confident is the ideal approach. Seeking professional legal advice addresses doubts to give you peace of mind.
At Coulter Legal, we help you work through the transaction step by step. We review and prepare Contracts of Sale to ensure purchase price, settlement date, warranties and other special conditions of the sale are accurate and right for you.
Where the business premises is leased, we help you understand your lease conditions and how they could affect you and your business. As specialist commercial lawyers, we have the expertise to negotiate and advise on lease terms and help with the transfer of lease process.
At every stage, our advice will be timely and insightful, aimed at streamlining the transaction so you can get down to business.
There are a number of things to think about when you are buying or selling your business. For both vendors and purchasers, this can be a very exciting but also a daunting time.
Our experienced commercial lawyers have prepared the below information, outlining some things to think about when buying or selling a business.
What to consider when selling a business
The first thing you should consider is, what are you selling?
There are a number of working parts which make up a business. The lease, plant and equipment, stock, digital assets (ie website, emails and social media accounts), the business name and intellectual property, as well as goodwill, are all components of your business.
You may be seeking to sell all or some of these components of the business. For example, you may be wanting to keep the business name and/or associated IP. Alternatively, where a business is owned by a company, in certain circumstances it may be appropriate to sell the entire company, via a sale of shares.
If you own the premises where the business is located, you will also need to consider whether you are selling the freehold as well, or will lease it back to the new business owners. If you are leasing the business premises, and have a landlord, it is a good idea to make them aware of your plans early, as you will likely require their consent to transfer the lease.
You then need to determine the value of your business, or the price at which you are willing to sell. While the purchase price will ultimately be negotiated between you and the purchaser, a professional valuer can assist you to determine the market value of your business, to give you a starting point.
Selling a small business
If you are selling a “small business”, which is defined as a business worth less than $450,000.00, you will need to provide the potential purchaser with what is known as a Section 52 Statement.
The Section 52 Statement sets out a due diligence guide for a potential purchaser and includes details on the financial performance of the business for the proceeding two years. It must be in the form prescribed by the Estate Agents (General, Accounts and Audit) Regulations 2018 (Vic).
This document should be prepared by your accountant as early as possible, to provide to any potential purchaser without delay.
What to consider when purchasing a business
If you are thinking about buying a business, it is important to be aware of the financials of the business, as well as any restrictions on the business which may be encountered. You need to consider whether the business is going to be a good fit for you and a good investment, from which you will be able to generate a profit.
Most importantly, you should inspect the financial records of the business going back a number of years and obtain the required Section 52 Statement where the price is less than $450,000.00.
You should ask your accountant or financial advisor to review the financials, so they can raise any concerns or ask any questions which you may have missed.
You should also be looking at the business itself. Take the opportunity to:
- Inspect the plant and equipment and stock, if any, which you are purchasing as part of the business. Is it in good condition and will it be fit for purpose?
- If the business premises is leased, review the lease to confirm whether there are any restrictions in place and ensure you are aware of your obligations.
- Check whether a planning permit has been or is required to be issued to operate the business from the premises. If a planning permit has been issued, what are the restrictions contained within the permit?
- Are there permits or licences in place for the operation of the business and if so, what will be required to transfer them? An example is a liquor licence, which requires amongst other things the licensee to complete their Responsible Service of Alcohol training and new entrant training prior to a liquor license being transferred
- Check if the Business Name and any trademarks used in the business are registered.
- Consider if there is anything else necessary to operate the business, such as a Franchise Agreement or other contracts, and consider what is required to transfer them to you.
Taking an opportunity to understand the components which make up the business, along with doing your due diligence, can help prevent surprises down the track.
Should I operate the company in my own name or set up a company?
There are a number of options available to you when thinking about the entity through which you will operate the business.
You can operate a business as a sole trader, in a partnership, in a company or trust structure. Consideration needs to be had to your own individual circumstances, as well as the type of business being purchased before a determination can be made as to how you should purchase the business.
Your lawyer can help you review your options for Business Structuring and liaise with you and your financial advisor to assist you to make an informed choice about the best entity in which to purchase the business. Your lawyer can also assist in setting up trusts or companies if required.
What documents are required for a sale or purchase of a business?
The documents required for the sale or purchase of a business vary depending on the transaction taking place, and the type of business being transferred.
Ordinarily, there will be a sale of business agreement, which sets out the main provisions of the agreement between the parties, including details of what is being sold, the purchase price, the settlement date, as well as provisions including warranties and guarantees, and any other conditions. If you are a vendor, often your solicitor will have a preferred form of sale of business agreement which they will prepare.
Where there is a lease, a transfer of lease will also need to be prepared. If you are purchasing the freehold there will be a Contract of Sale and Vendor’s Statement for the freehold property which is likely to be separate but contingent upon the sale of business agreement being completed.
There are also a number of other documents which may need to be prepared and signed by the parties to the transaction prior to settlement taking place, including:
- ASIC transfer number, to effect the transfer of business name;
- A liquor licence transfer, where there is a liquor licence in place;
- Application for Transfer of Registered Food Premises, where you are transferring a café, restaurant or the like;
- Transfers of permits for outdoor signage and seating areas, where applicable; and
- Transfer of Franchise Agreement or other licences relating to the business, if applicable.
Finally, there may need to be other documents to be obtained by the parties to a transaction or matters dealt with prior to settlement taking place. This may include things like obtaining a mortgagee’s consent to the transfer of lease, or a PPSR release for a security held over assets of the business which are to be transferred.
Who prepares these documents?
Ordinarily, the vendor or their representative will prepare most of the documentation for the sale, including the sale of business agreement. These will then be reviewed by the purchaser and/or their legal representative. .
The Purchaser, or the landlord, will also ordinarily prepare the transfer of lease documents. Usually it is the Vendor who will be liable for the Landlord’s cost of consenting to the transfer of Lease.
In some circumstances it may be beneficial for the purchaser to prepare documents for the transaction, for signature by both parties, particularly where that document requires the purchaser to provide the majority of the information and details. This includes, for example, in the case of an application for the transfer of a liquor licence.
At what stage of the process should I speak to a lawyer?
Ideally, you should get in contact with your lawyer as early as possible, when you are considering buying or selling a business. It is important to seek legal advice prior to entering into any binding agreement or signing heads of agreement in relation to a sale.
Often, parties will only approach their lawyers after the deal has been done, requesting the lawyer prepare the relevant documents. This can often lead to unexpected delays, particularly where your legal representative may not have all the relevant documentation, or may raise issues that were not discussed between the parties when the deal was negotiated.
For a vendor, where your lawyer is involved from the beginning they have the opportunity to discuss the sale with you, advise you what documentation and information they will need to prepare the relevant documents, advise you on any important matters you need to discuss with the purchaser and help you negotiate the sale (if you require them to do so). This will also mean they will be in a position to provide the sale of business agreement as soon as the deal is agreed, as they have had time to prepare.
For a purchaser, getting your legal representative involved as early as possible is also beneficial. Your legal representative can assist you to undertake relevant searches of the business and the premises prior to the deal being finalised and can review heads of agreement and a sale of business agreement prior to it being signed.
Even if you do not want your lawyer’s assistance in the negotiation stage, giving them notice of the impending sale or purchase will enable them to be prepared to assist you when and where required.
Once a deal is done, it is very important that it be correctly documented, through a sale of business agreement.
How can Coulter Legal help?
As detailed above, there is a lot to think about when buying or selling a business. We are able to guide you through the process of buying or selling a business, step by step, assisting you from the early stages of negotiation to the settlement and finalisation of the sale.
We aim to help to streamline the transaction so you can get down to business sooner.