This article outlines some of the main issues that purchasers should consider. By addressing these issues, the risks commonly associated with buying a business may be reduced.
Prior to buying a business, it is important to look at the past records and the current documents of the business. This includes monthly and yearly sales patterns for the past three years. Depreciation schedules and all the costs recorded for the business should be checked. Ensure that the records comply with tax requirements. Also verify the value and condition of any existing stock.
When buying a business, the purchaser should decide upon the structure of the business to be implemented. The three main structures a purchaser may choose are a sole trader, partnership, or limited liability company.
This contract is normally prepared by the vendor’s lawyer pursuant to negotiations between the vendor and the purchaser of the business. The purchaser would engage their own lawyer to vet the documents, and often new clauses would be added to the contract. Normally, the assets would be listed and the ‘goodwill’ component of the business stated clearly. The liabilities to be assumed by the purchaser would also be set out.
The contract can include clauses that protect the purchaser. Examples include:
When a business changes hands, it is the purchaser’s decision whether to retain the employees of the previous owner. It is the responsibility of the purchaser to inform any employees if they are to be re-employed. Often, new employment contracts are drawn up by the purchaser, as original contracts (with the vendor) are terminated. However, the original employment contracts may still be used, if the purchaser so chooses. Purchasers should be aware that the use of original employment contracts requires the full recognition of past services and therefore all accrued entitlements will be the responsibility of the new purchaser. On the other hand, if the new owner decides not to re-employ existing staff, the onus is on the vendor to provide employees with all their statutory rights and entitlements arising from a termination of employment.
Any existing lease between a vendor and their landlord may be assigned to a purchaser with the consent of the landlord. Alternatively, the purchaser can enter into a new lease with the landlord. Before the lease is signed, it is important to examine the terms and conditions of the lease. Alterations to the lease must be considered and put forward prior to its signing.
Special attention should be paid to any terms which restrict the type of business which may be permitted on the property. These restrictions are often strictly adhered to by the courts and may make it difficult for the purchaser of a business to diversify their business. To combat this, clear wording should be used, keeping future developments in mind.
Stamp duty is a substantial charge that is payable by the purchaser and is governed by the Duties Act 1997 (NSW). As of 1 July 2016, the New South Wales government has abolished stamp duty on certain business assets, which means the purchaser is no longer subjected to pay stamp duty on them. These exempted business assets include:
Some business assets, however, remain dutiable and the purchaser may therefore be liable to pay stamp duty. These dutiable assets can include:
Before buying a business, the purchaser should be aware of any permits or fees that must be paid in order to carry out the business legally. Often, required permits are not transferable to the purchaser, and a new fee must be paid. Under the law, Workers’ Compensation insurance must be taken out where there are employees. Public liability, fire and contents insurance would be useful and should be considered.
This article addresses some of the more pertinent issues surrounding the buying of a business. It highlights matters that purchasers should consider before signing a contract to buy a business.
Comasters has acted in many ‘sale and purchase of business’ transactions. The firm receives instructions from vendors and purchasers of businesses.
© Comasters May 2005. Updated February 2018.
Important: This is not advice. Clients should not act solely on the basis of the material contained in this paper. Our formal advice should be sought before acting on any aspect of the above information.