Becoming a business owner can be an exciting commercial opportunity. Owning a business can be very rewarding, but at the same time can involve uncertainty and risk. It is therefore imperative that you familiarise yourself with the ins and outs of purchasing a business; from the initial stages of due diligence, all the way to settlement (and beyond). Whilst it can be a highly complex process, we have fleshed out the following factors for your consideration:
1. Legal Due diligence
Before purchasing a business, you should seek answers to some key considerations:
- Why is the vendor selling the business?
- What is the vendor’s client base?
- What are the vendor’s liabilities?
Engage your solicitor and/or accountant to conduct due diligence on the business by gathering material information prior to you making an offer. Your solicitor can also investigate whether the vendor has any ongoing liabilities or debts as well as past and current disputes relating to the business. This information will be invaluable in helping you to ascertain the true position of the business, and therefore 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 – e.g. should you purchase in your personal name or using a company? Should you use a trust structure?
2. Restraint of trade
A restraint of trade clause (often referred to as a non-compete clause), is a clause in the formal business sale contract prohibiting the vendor from conducting a competing business after the sale within a specified distance and for a certain time following settlement. Seek your solicitor’s advice to determine what kind of restraint will be appropriate for your circumstances before you sign the heads of agreement.
One of the most overlooked factors when purchasing a business is the adjustment and recognition of employee entitlements and employment agreements.
Do you have an obligation to employ the employees? Will there be a transfer of employees? If there is, you should ensure that the vendor discloses full details of employee entitlements to you such as annual leave, personal leave and long service leave entitlements. These entitlements may become your liability and responsibility after settlement, so clear agreement should be reached with the vendor about how these will be treated.
The consequences of not dealing with the employees’ entitlements early on can be a very costly surprise at settlement!
4. Assistance period
Assistance periods have become increasingly popular as purchasers may require the vendor’s introduction to their client base and business systems prior to settlement. Whilst the assistance period ranging from two weeks to one month is common, it is important that this discussion takes place with the vendor prior to contract signing if you intend to include this help as part of the purchase.
There are several issues that must be dealt with in respect of the business premises lease. For example, does the landlord of the business premises have a mortgage? It is critical that you seek the mortgagee’s consent to any proposed transfer of lease, as failing to do so may result in you being forced to vacate the business premises following the landlord’s mortgage default.
You need to ensure that you are aware of any licences that you require to run the business and ascertain whether you will be applying for new licences or arranging a transfer from the vendor.
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.
You should also 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.
7. Intellectual property
Is the business sold together with its business name, website, contact number and social media accounts? If it is, your solicitor should ensure that these are sufficiently reflected in both the heads of agreement and formal contract of sale.
Are you ready to buy a business? Contact Dangerfield Exley Lawyers now, for a full and frank discussion.
*Please note the 7 factors above are not an exhaustive list.