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What you need to know when buying or selling a business

Unlike buying and purchasing property, buying or selling a business is a very different process, taking into account various factors and steps involved. The following are some of the items that our legal team has collected thanks to extensive experience from successful transactions under their support. We proudly believe that you might find them handy one day if you want to take up a business or put your own one for sale.

Due diligence

Due diligence is the investigation that you are expected to take before entering into an agreement or contract with another party. Due diligence is vital even if you believe you are fully informed about the business as they will give you different perspectives to help you perfect your assessment before final purchase decision.

It is important to seek advice at the earliest opportunity regarding the most appropriate ownership structure (sole trader, company, trust or partnership) so that tax effective strategies can be put in place. Your accountant, legal consultant or business lawyer can be a great assistance with this aspect of your purchase.

To conduct a due diligence assessment of a business you will need to carefully review and consider the following:

  • Financial performance: Income statements, balance sheets and profit and loss records for the last 3 years; tax returns including business activity statements; records of accounts receivable and payable; level of stock required and how this will affect cash flow
  • Management and Operations: Minutes of director’s or management meetings; business paper files (if available); the seller’s claims about their business (why are they selling and what is their reputation like), details about plant, equipment, fixtures, vehicles; existing contracts with clients/staff/suppliers and privacy details; partnership agreements; guarantees and indemnities and warranties; lease requirements; franchise setup and ongoing costs (if applicable)

A Vendor’s Statement (or Form 2)

A Vendor’s Statement (or Form 2) provided by the Land and Business (Sale and Conveyancing) Act 1994 must be given to a purchaser if the purchase price of the business is under $300,000. This does not include GST, the price of land or any stock that is included in the sale. The Form 2 will disclose the following important information:

  • The purchaser’s cooling off rights;
  • Staff, including their role, hours per week and rates of pay;
  • The financials for the business over the last 3 years;
  • If there have been any adverse circumstances suffered by the business which
  • Have affected takings;
  • Land or leased premises associated with the business;
  • If there is an asbestos register for the business premises
  • If any notices have been issued for non-compliance with the terms of the Lease;
  • If any orders have been given for non-compliance with the law (for example the Food Act 2001)

Contract

The contract should detail the following items:

  • Timeframe for due diligence;
  • Warranties;
  • Director’s guarantees;
  • GST and legal costs;
  • If there is to be a new Lease or Assignment of Lease;
  • Transfer of employees (if applicable) and how any outstanding entitlements are to be dealt with;
  • Assets to be transferred including website, email addresses, phone and fax
  • Social Media accounts;
  • Excluded assets such as Vendor’s personal laptop or tools;
  • Valuation of stock in trade and what stock is included;
  • Franchise agreements associated with the business;
  • Liquor or outdoor dining Licenses;
  • Restraint of Trade;
  • Business names;
  • Training or Vendor assistance;
  • How the debts and receivables of the business are dealt with

Settlement process

Once the Contract has been signed the focus will then be towards settlement and liaising with all other parties involved in the sale. This can include dealing with your financiers, the transfer of any other contracts that the business requires to function, the perusal of either the existing lease and deed of assignment or a new lease, searching the Personal Property Securities Register for business loans or charges on equipment. Any outgoings associated with the business and/or the lease will be adjusted. Employee entitlements for long service and annual leave must also be taken into consideration.

Settlement Statements are prepared showing the purchase price, deposit paid, agreed stock value (the morning of settlement) adjustments of rates, taxes and other business outgoings, staff entitlements, rental payments, amounts payable for any loans or hire agreements.

We will advise the funds required to settle and/or cheque directions just prior to settlement.

The final figure is not often known until the morning of settlement.


Buying Business, Selling Business
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