Renee Stevens from SRM Lawyers (located in Lane Cove) is ITC’s legal eagle and each month she writes an article for ITC about legal issues that impact Lane Cove residents. This month Renee is looking at the points you should consider when buying a business. Take it away Renee….
The purchase of a business can be an exciting and rewarding experience, but there are many factors that need to be considered to ensure that you don’t suffer financial loss or have your business fail completely. These 7 points highlight some of the important questions that need to be asked before jumping into a business purchase.
Point 1 – Why are you buying the business?
It may be that you’re no longer happy in your current job and have had a lifelong dream of owning a café in your local suburb. While making the switch from one industry to another may sound like a great idea, you need to consider factors such as whether you have the right qualifications and experience in that particular business or industry, or whether you have the necessary business management training or technical skills required for the new business.
Point 2 – Why is the vendor selling the business?
Is the business going so well that the current owner wants to step down and take a break? Has the business been declining for several months because the current owner has lost interest or has personal problems? Is the business in a poor location? Have there been recent legal claims against the business? Does the business owe debts/taxation liabilities?
There are countless reasons why the vendor may be selling the business, so it is important that you obtain a professional evaluation of the business and full disclosure of the business’ financial information from the vendor – a due diligence check. It’s also important to check that the business has been managed properly and that proper financial records have been kept.
Point 3 – What due diligence needs to be carried out?
A process of due diligence is the best way for you to assess the value of the business and the risks associated with buying it. Through this process, you’ll investigate all aspects of the business, such as its operations, financial performance, legal and tax compliance, customer contracts, intellectual property and assets. Depending on the nature of the business, advice may be required from professionals such as an accountant, financial adviser or management consultant.
The due diligence process may raise a number of questions, such as whether the current values of the assets justify the price, whether the profits are adequate for that type of business or whether the level of overheads can be maintained.
Point 4 – What entity will purchase the business?
Advice may be required to determine the legal entity most appropriate to purchase the business. Relevant factors include the nature of the business, income tax and CGT, the limiting of liabilities and any requirements of a financier.
Point 5 – How is the purchase price apportioned?
The purchase price is often split between equipment, plant, stock and goodwill. The level of apportionment will determine how much duty is to be paid on the purchase price and will have tax implications for both parties.
Goodwill is the established reputation of the business as a quantifiable asset. It may be associated with various aspects of the business such as the location from which it operates, trade names, trademarks, packaging or other distinctive features of the business. The goodwill of a professional practice may be associated more on the skills, personality and reputation of the business owners. As goodwill is an essential part of a business from the purchaser’s perspective, the sale contract must place proper restrictions against the vendor’s ability to interfere with the goodwill being sold.
Point 6 – Are the business premises the subject of a lease?
If the premises are subject to a lease, the lease will need to be reviewed. If the lease conditions are acceptable, the contract should be made conditional on the landlord’s consent to the lease being transferred to the purchaser within a specific time after exchange. It may also be appropriate for the lease terms to be renegotiated. If a new lease is required, this will involve direct negotiations between the purchaser and the lessor or their lawyers.
Where the leased premises are subject to a mortgage, the mortgagee’s consent will be required regardless of whether the purchaser is taking the transfer of an existing lease or is entering into a new lease. This ensures that the mortgagee is bound by the lease and protects the lessee’s right to remove fixtures, if applicable. Read Renee’s article on leases here.
Point 7 – What charges or security interests are registered against the business and/or business assets?
Plant, equipment, fittings and chattels all fall within the broad definition of ‘personal property’ under the Personal Property Securities Act (2009) (Cth). A search should be made of the Personal Property Securities Register to find registered security interests over any personal property as well as security interests over the business as a whole. Not checking for existing security interests is a very common trap that new business owners fall into. If you take over an existing business, you could either become liable for the repayments on financed equipment, fixtures or fittings which you already paid for as part of the purchase price, or have the items repossessed by the financier if payments have not been made.
As appropriate, searches should be conducted on the vendor and the business name, any intellectual property associated with the business and on the business premises.
These points provide a broad overview and don’t cover every aspect of purchasing a business, such as whether employees will transfer with the purchase, whether restraints should be placed on the seller to stop them competing against you after completion of the purchase or whether licensing requirements relate to the particular industry.
It’s really important that you seek legal advice in the early stages of your business purchase negotiations to ensure that you don’t encounter any nasty surprises once the deal is done. The team at SRM Lawyers have extensive experience with business sales and purchases. Please don’t hesitate to contact us for an obligation-free chat if you are considering selling or purchasing a business.
If you are looking at starting or buying a business in Lane Cove, read our article here on some practical tips to help you with your business venture.
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Website: SRM Lawyers
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This is advice of a general nature, this article does not constitute legal advice and is not meant to be complete or exhaustive.
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