Where do I start, what do I do?
Being a business owner can be an exciting commercial opportunity. It is therefore imperative that you familiarise yourself with the ins and outs of purchasing a business, from the initial stages of due diligence to settlement. Whilst it can be a highly complex yet rewarding process, we have fleshed out the following factors for your consideration:
- Legal Due diligence
Before purchasing a business, consider why the vendor is selling the business, their client base and whether they have any liabilities on foot. Engage your solicitor and accountant to conduct due diligence on the business by gathering material information prior to you making an offer. Your solicitor will also investigate if the vendor has any ongoing liabilities or debts as well as past and current disputes relating to the business. This information will be pivotal for you to ascertain if the business is worth purchasing.
It goes without saying that you should also consult your accountant’s advice in relation to the commercial viability of the business including any financial and taxation concerns, as well as the ownership structure of the business – should I purchase as a sole trader, company or a trust structure?
- Restraint of trade
A restraint of trade clause is similar to a non-compete clause, where you prohibit the vendor from conducting a competing business to you within a certain distance from your business premises, for a period of specified time. Seek your solicitor’s advice to determine what kind of restraint will be appropriate for your circumstances.
One of the most overlooked factors when purchasing a business is the adjustment and recognition of employee entitlements.
Do you have an obligation to employ the employees? Will there be a transfer of employees? If there is, the vendor must disclose full details of employee details to you such as the employees’ annual leave, personal leave, redundancy and long service leave entitlements and clear agreement should be reached between both parties prior to settlement.
You should also have your accountant verify the entitlement figures and how they should be adjusted at settlement.
The consequences of not dealing with the employees’ entitlements can be a very costly exercise, to say the least.
- Assistance period
Assistance periods have become increasingly popular as purchasers may require the vendor’s introduction to their client base prior to settlement. Whilst the assistance period ranging from two weeks to one month is common, it is important that this discussion takes place between the vendor and yourself prior to signing of the contract and be documented accordingly.
Does the vendor have a mortgage at the business premises? If the vendor has a mortgage, it is critical that you seek the mortgagee’s consent to any proposed transfer of lease, failing which you may be forced to vacate the business premises in the event the vendor defaults on their mortgage.
Further, you must ensure that the lease is transferred to you in a proper manner. Have realistic expectations on whether the landlord will approve you as a tenant by communicating with the landlord’s representatives at the beginning of the transaction to ensure the purchase proceeds without delay.
If you are purchasing a café business, you may be required to transfer the existing liquor licence and food registration certificate to your purchasing entity at settlement.
Ensure that the relevant courses are undertaken prior to applying for these licences, i.e. a responsible service of alcohol (RSA) certificate and new entrant training course are required prior to submitting your liquor licence application.
- Intellectual property
Is the business sold together with its business name, website, contact number and social media accounts? If it is, your solicitor must clearly state the terms on the contract of sale and specifically state that these assets are included in the sale.
At settlement, the passwords and transfer numbers of these assets should be provided to you.
Are you ready to buy a business? Contact Annabelle Yap for a full and frank discussion.
*Please note the above is not an exhaustive list.
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