A Purchaser’s Guide to Buying a Business

Buying a business can be one of the most exciting and rewarding decisions that any business owner can make. We here at Roberts Crosbie Mortensen Lawyers are experts in assisting prospective Purchasers on their journey. We are business lawyers and we are business owners. We love nothing more than guiding our clients through the purchase process.

This Purchaser’s Guide is designed to break down what can seem like a daunting and complex process into more understandable components. We discuss and explore key issues that are common to the purchase process so that you, as a Purchaser, can have a better understanding of what is involved from a legal perspective.
We hope that you find this practical Guide informative and if you have any questions or queries, our specialist Business Lawyers here at Roberts Crosbie Mortensen Lawyers will be more than happy to assist. Our approach here at Roberts Crosbie Mortensen Lawyers is to make business happen, not to get in the way.

Asset Purchase
In this Purchaser’s Guide we will be focusing on the purchase of a business by way of asset purchase. This means the purchase of a business is by way of purchase of its physical and non-physical assets. Physical assets include the plant, equipment and stock of a business. Non-physical assets (or intangible assets) include intellectual property and goodwill.

Purchaser Tip

The purchase of a business by way of asset purchase is the most common way a business is purchased because of a reduced liability factor for the Purchaser. The Purchaser gets to choose what assets it wants to buy, and does not automatically assume any liabilities of the business unless it contractually agrees to do so.

Share Purchase
A share purchase is the purchase of all the shares in a company that owns the business. As a Purchaser you take on all the assets and all the liabilities of the company. The advantage of a share purchase is that from the outside looking in, nothing appears to change with the business and there can be less to do contractually on hand over of the business.

Purchaser Tip

There is an increased liability risk for the Purchaser on a share purchase and in particular, liability around tax. That is why a Purchaser needs to pay particular attention to these factors in their due diligence and obtain robust warranties from the Seller if they are purchasing a business by way of shares in a company.

Mergers
Mergers can happen in a number of ways. A company may purchase the assets of an existing business and then the Seller of that business might buy in (buy shares) in the purchasing company. Alternatively, two companies may merge to form a new company with a common shareholding and asset base. Or two parties might form a joint venture which, while technically not a merger, is a form of common business ownership.

Purchaser Tip

For the purposes of this Purchasers’ Guide we are focusing on the purchase of a business by way of asset purchase.

The path to becoming a business owner will vary according to the individual. There are however certain common steps that most Purchasers will undertake.

Identify Target Business

• Personal research of the market, and
• Engage with a business broker.

Business Screening

• Make contact with the Seller (or Business Broker),
• Enter into a Confidentiality Agreement,
• Request physical inspection of the business, and
• Request summary of most recent financial performance of the business.

Negotiate Key Terms

• Enter into a Heads of Agreement,
• Engage a lawyer to review the Heads of Agreement and begin legal due diligence,
• Engage an accountant to begin financial due diligence, and
• Conduct your own commercial due diligence.

The Sale Contract

• The Seller’s lawyer prepares the Agreement for Sale and Purchase,
• You review the agreement with your lawyer,
• Final terms are negotiated and agreed,
• The Sale Contract is signed and exchanged, and
• The Seller and Purchaser are now legally locked in.

Preparation for Settlement

• Continue due diligence,
• Prepare funding,
• Finalise employee contracts,
• Make arrangements for handover of key contracts,
• Handle practical matters such as changeover of utilities, and
• Make a list of items that are required from the Seller on settlement.

Settlement

• Stocktake (if required),
• Purchaser pays the purchase price,
• Seller gives the Purchaser possession of the business, and
• The Purchaser is now the owner of the business and in charge.

Post- Settlement

• The Seller provides training and assistance (if contractually obliged to do so),
• The Purchaser continues its due diligence to ascertain that all that the Seller represented and warranted is true, and
• The Purchaser runs a successful and profitable business.

One of the first things every Purchaser needs to do on their purchase journey, is to think about how they are going to pay the purchase price. If you need to borrow any part of the purchase price from a lender, then begin discussions with your lender early on.

Purchaser Tip

A finance condition is a special condition inserted in the Agreement for Sale and Purchase to protect a buyer who needs bank approval.

Business Loans

Business loans are generally structured differently from personal loans and loan ratios and security requirements differ .

Be aware and clarify with your bank:

• What terms the loan will be on (interest rates for business lending are often higher that home loan rates); and
• What security the bank will require such as security over the business assets, personal guarantees for company borrowings and security over non-business assets (the Purchaser’s home being a common example).

Purchaser Tip

If you are company Purchaser borrowing from a bank, the bank is likely to want security over all the assets of the company. This is done by way of execution of a General Security Agreement which is registered on the Personal Property Securities Register.

The Two Payment Dates
Remember that there are generally two points in the purchase process when a Purchaser needs to have funds available to pay, being:

• Payment of the deposit (often 10% of the purchase price) which is normally paid on the signing and exchange of the formal Agreement for Sale and Purchase, although this can be negotiated; and
• The completion date (handover date) when the balance of the purchase price is paid, usually being the other 90% plus any purchase price adjustments.

Purchaser Tip

Don’t forget to factor in purchase costs when sorting your funding: legal and accounting costs, transfer duties (if applicable) and working capital requirements to meet initial business costs.

The million-dollar question: How much is the business worth and how much should I pay for it? How do you know??

How a business is valued is subjective and ultimately determined by negotiations between the Seller and the Purchaser. There are a number of factors that will determine a purchase price.

As a Purchaser be aware of:

• The historic profitability of the business,
• Whether the business is in a growth, stable or “trouble” phase,
• The physical condition of the physical assets of the business,
• Competition, and
• Market forces and trends.

Purchaser Tip

One of the most important factors to consider as a Purchaser when determining a purchase price is the Seller’s reasons for putting the business up for sale. Are they (genuinely) retiring? Is the business in trouble? Are they looking to do something in a similar industry? Do they need to get out or are they simply recouping their own investment and moving on?

Valuation Methods

There are no hard and fast rules when it comes to valuing a business and determining a purchase price. There are however, two (2) common methods being:

• Asset valuation method, and
• Multiplier method.

Asset Valuation

This is the valuation of all of the assets of the business. This includes the physical assets (plant and equipment) and the intangible assets of the business (goodwill such as brand and reputation).

Difficulties can arise using this method in that:

• A Seller and buyer may not agree on the current market value of a physical asset (how to agree on fair wear and tear for example); and
• Intangible assets, such as goodwill, can be hard to value and justify.

Purchaser Tip

A Seller will generally want the goodwill component of a purchase price to be higher, whereas you as a Purchaser want physical assets valued higher. This is because, as a Purchaser, you can claim depreciation on physical assets; you cannot on goodwill.

Multiplier method

The multiplier method involves multiplying the annual profit of a business to arrive at a purchase price. The multiplying number can be industry specific (there is no set multiplier) or simply a number the Seller and buyer agree. This type of valuation is more common for businesses with a low physical asset base such as professional service providers.

A common formula you might have seen is: EBIT x [3]

Which would mean the purchase price in this case is determined as Earnings Before Interest and Tax multiplied by three.

Another way to look at this type of valuation is to view it from the basis that as Purchaser, how long will it take you to recoup your investment (3 years in the above scenario).

As a Purchaser looking to buy a business, you may come across the phrase qualified buyer.

What this means may differ as to the size and type of the business you are looking at buying but generally speaking a Seller or the Seller’s broker will want to know that you have the ability and capability to complete the purchase. That you are not a window shopper but someone with proper intent and the ability to buy.

Becoming a qualified buyer might be a relatively informal process whereby you are simply questioned as to your financial status and experience in the applicable industry.
Alternatively, you might be asked to provide a resume, a formal financial statement showing your assets and liabilities and sign an authority, allowing the Seller to run background credit checks on you.

Purchaser Tip

If you are asked to provide financial information to a Seller or Seller’s agent make sure a Confidentiality Agreement is in place.

If you are looking at buying a franchised business, then most of what we discuss in this Guide applies but it is important that you understand that franchising is a specialist type of business and requires specific considerations. Also, be aware that there is specific franchising legislation in force in Australia.

The Franchising Code of Conduct was enacted in 1998 under the Competition and Consumer Act 2010 (Cth). Its general purpose is to regulate the franchise industry and assist franchisees in making an informed decision prior to entering into a Franchise Agreement. As a buyer of a franchise this means you must be provided with a Disclosure Document before you sign a Franchise Agreement.

A Disclosure Document is a document containing information about the franchise, the franchisor and the franchise network. Intended to be an informative tool, Disclosure Documents these days often run 50+ pages and can swamp and confuse a prospective buyer with information overload.

In addition, Franchise Agreements are notoriously one-sided and loaded in favour of the franchisor. They often contain onerous provisions that have become “normalised” and accepted in the franchise industry. Franchise Agreements do a very good job protecting the franchisor, not the franchisee.

Purchaser Tip

When it comes to buying a franchise, we cannot stress enough the importance of our clients’ obtaining expert legal advice so they understand what they must pay and what they must do:

• On commencement of the franchise,
• During the term of the franchise, and
• On exit of the franchise.

During the purchase process what documents are you likely to come across?

Confidentiality Agreement
As a Purchaser when you begin asking questions and/or requesting documents to review and assess a business (due diligence), it is likely that the Seller, or the Seller’s business broker, will ask you to sign a Confidentiality Agreement (also known as a Non-Disclosure Agreement or NDA). Simply put, a Confidentiality Agreement places an obligation on you to not disclose information about the business to any other person. A simple but important obligation.

Purchaser Tip

Most Confidentiality Agreements should give you permission to provide the confidential information to your professional advisors being your lawyer, accountant and bank.

Information Memorandum
An Information Memorandum is designed to provide prospective Purchasers with a snapshot of key aspects of the business. Normally prepared by the Seller’s broker, it should provide a high-level overview of the business with a bit of history on the business and indicative financial information such as profit and loss for the past three years.

Purchaser Tip

An Information Memorandum is normally expressed as being provided for information purposes only and there is a statement in the document to the effect that it is no substitution for the Purchaser conducting its own due diligence enquiries with regards to the business. This means you should conduct your own legal, commercial and financial due diligence,

Heads of Agreement
If a Purchaser indicates to a Seller that they are serious about a possible purchase, the Seller and Purchaser might then enter into what is known as a Heads of Agreement. Often referred to as ‘the agreement before the main agreement’, a Heads of Agreement is signed prior to the formal Sale and Purchase Agreement. It allows the Seller and Purchaser to agree on certain key commercial terms such as the purchase price, timing and a methodology for due diligence without binding themselves to the deal.

Purchaser Tip

As a Purchaser you want the Heads of Agreement to be non-binding and flexible so that if, prior to the formal Agreement for Sale and Purchase being signed and exchanged, you decide that you do not wish to proceed with the purchase, you can back out without repercussions. We recommend you request your lawyer review this document as it will be the foundation of the Agreement for Sale and Purchase.

The Agreement for Sale and Purchase
The formal Agreement for Sale and Purchase of a Business (also referred to as the Sale Contract or the Business Sale Agreement) is the cornerstone document when it comes to your purchase and will set out the terms and conditions for the sale and purchase.

The Seller’s solicitor will generally prepare the first draft of the agreement send it to you or your solicitor for approval. Then the back-and-forth begins as to negotiation and finalisation of the terms of the agreement. This might be done directly through the lawyers and/or through the business broker.

When the terms of the agreement are agreed, a final copy will then be prepared, which will usually contain a schedule of assets included in the sale, a list of employees and a copy of the lease for the business. The Seller and Purchaser will each sign the final version and then the parties will exchange the contracts after which the agreement becomes a legally binding contract.

Following exchange, you as the Purchaser will then generally be required to pay the deposit (if one is recorded in the agreement).

Settlement Documents
After the Agreement for Sale and Purchase is signed and all Special Conditions satisfied (if any), the Seller and Purchaser will then prepare for settlement (also known as completion) and during which you may be required to sign:

1. Bank Documentation – If you are financing your business purchase, your bank will generally require you to sign loan and security documentation.
2. Deed of Assignment of Lease – If the business you are purchasing has a lease in place for the business premises you need to have the rights under that lease assigned over to you as Purchaser. This is done by way of a Deed of Assignment of Lease which will require your signature, the signature of the Seller and most importantly the signature of the Landlord of the business premises.
3. Assignment of Key Contracts – If the business relies on contracts that are important or key to the ongoing success of the business, then these contracts should be formally transferred (assigned) across to you as Purchaser by way of a Deed of Assignment.
4. Employment Contracts – As discussed in Chapter Eleven, we highly recommend that written employment contracts are entered into with all employees prior to settlement and that this is definitely done for key employees.

Purchaser Tip

Before you sign any document in the purchase process, you should have it reviewed by your lawyer.

Before you sign a binding Agreement for Sale and Purchase, it is critical that you obtain advice on how you are going to complete the purchase. And when we are talking about the “how”, we are really talking about what entity or business structure you will use (in order) to complete the purchase.

What entity?

This decision needs to be discussed with both your lawyer and accountant, as there are competing accounting and legal factors at play. Generally speaking, three (3) key factors decide the outcome, being:

1. Cost: The cost to form the purchasing entity and what ongoing compliance costs will be.
2. Tax efficiency: What is the most tax efficient entity for the purchase of the business based on the Purchaser’s circumstances.
3. Limitation of liability: What entity best protects you personally from liability, for example if the business fails.

The Four Most Common Business Structures

There are 4 commonly used business structures when it comes to the acquisition and operation of a business. These are as follows:

Sole Trader

The most basic and simplest way to purchase and trade a business is under your own name, referred to as being a sole trader. There are no expensive setup costs and other than registering a trading name with ASIC and/or a registering for GST (if applicable), you are good to go. The downside to being a sole trader is that it is the riskiest way to run a business from a liability perspective as sole traders are personally liable for the debts of the business, meaning a sole trader’s personal assets (their residential home for example) can be exposed in the case of business failure. This structure is also very limited from a tax strategy point of view.

Partnership

A partnership consists of two (2) or more individuals (or companies) working together in a business. Partners generally share profits equally and are also jointly and severally liable for any losses or liability of the partnership. That means that a creditor can pursue any partner in the case of failure to pay debts or failure of the business. This exposure to liability again, as in the case of a sole traders, makes partnerships less attractive as a preferred business structure. Although partnerships can be set up utilising trust structures for asset protection and tax purposes, this can be a more complex and less understood structure in a lot of industries causing contracting headaches.

The Limited Liability Company

The most common way to purchase a business and operate the business is to use a company. In Australia the notation “Pty Ltd” refers to a propriety company or private company being a company that has less than 50 shareholders as opposed to a large, listed company on the stock exchange. A private company gives directors and shareholders certain protections at law and all company income is taxed at a fixed rate rather than individual rates. A company provides a nice mix between balancing tax efficiency and limiting liability for business owners.

Joint ventures

Joint ventures are business undertakings between two or more parties and can be undertaken by way of a simple partnership as referred to above or by way of incorporation under a company structure.

Purchaser tip

If you are considering the purchase of a business by way of a joint venture, then a partnership agreement, shareholders’ agreement or joint venture agreement (whichever is the applicable) should always be prepared by a lawyer and signed.

Deciding what structure you are going to use for the purchase of a business is a vital step in the purchase process. You should obtain advice from your lawyer and accountant about what structure would best suit you and your business needs at an early stage and prior to executing and signing any agreement for sale and purchase.

Due diligence is the process whereby a Purchaser undertakes its own research to verify that the business it intends to purchase is commercially, legally and financially suitable for its purposes.

Purchaser Tip

Due diligence can be undertaken prior to signing the formal agreement for sale and purchase of business and/or as a special condition under the agreement sale and purchase (meaning after exchange but before completion).

Financial Due Diligence

Is focused on the accounting and financial performance of the business. It is research of the financial history of the business to justify the purchase price and to make future predictions. Accountants are normally bought on board to conduct financial due diligence.

Commercial Due Diligence

This includes market research including analysis of business positioning in the market; business strategies and sustainability, industry dynamics and competitors’ behaviour. Commercial due diligence is often undertaken by the Purchaser themselves.

Legal Due Diligence

Consists of the analysis of legal documentation relating to the business in order to identify legal risks (and advantages). Legal due diligence is undertaken by lawyers.

Purchaser Tip

There are three (3) key components to the process of due diligence, which are usually run separately, however, they must be considered and analysed as a whole to be effective. A team approach is the best approach.

When it comes to due diligence how is the process conducted?

The Seller and Purchaser will agree a timeframe for the due diligence to be undertaken. The length of time required will depend on a number of factors, including:

• How thorough the Purchaser wants to be,
• How quickly a Seller responds to information requests,
• The complexity, size or scale of the business involved, and
• Timing considerations for handover such as the need to meet a deadline.

As a result, due diligence can take anywhere from a few days to a few months. There is no one size fits all.

Purchaser Tip

In our experience most due diligence investigations are conducted over a two (2) to six (6) week period.

Information Requests

Most due diligence is done by way of information and document exchange. That is, the Purchaser will request information and documents from the Seller to review. The information can be exchanged in person, through data rooms (either physical or an online) or most commonly via email.

Legal Due Diligence

When it comes to legal due diligence lawyers, on behalf of the Purchaser, should be looking at:

• The Seller: To check and confirm their legal status and implications as to giving of vendor warranties.
• Business Assets: To assess legal ownership of the business assets and just as importantly any liabilities attaching to the business assets.
• Compliance: To ensure the Seller holds all appropriate licences and authorities to conduct the business and how these apply to the Purchaser.
• Key Contracts: To assess their validity and ability to be transferred to the Purchaser.
• Employees: To assess the terms and conditions of employment of all employees and in particular, to identify key employees and the status of their employment.

How We Conduct Legal Due Diligence

Here at Roberts Crosbie Mortensen Lawyers we have a number of tools that are used to assist our clients when it comes to due diligence. Key tools of our trade are

• Due diligence checklist: an overarching list of matters we think each client should review and consider.
• Contract review checklist: a checklist to be applied to the review of key business contracts.
• Lease review checklist: a checklist to be applied to the review of any business leases.

Purchaser Tip

Legal due diligence is often focused on review of documentation, however, a detailed physical inspection of the business, its premises and assets by the Purchaser is also required to ensure that matters stated in documents match up with reality.

Due Diligence Findings

When the financial, commercial and legal due diligence has been done the Purchaser should have a much better picture of the business and in particular:

• The value of the business.
• The commercial viability of the business.
• Any identified risks associated with the business.

Which in turn, enables a Purchaser to make the ultimate decision on whether they wish to proceed with the purchase of the business and on what terms.

Purchaser Tip

Due diligence is a vital step in the purchase process and should always be undertaken. Do not rely on what the Seller or the Seller’s broker tells you. Engage specialists and together conduct your own independent research on the business.

Employees: Your greatest asset or your greatest liability?

One of the most important decisions to be made when purchasing a business is how you, as the Purchaser, are going to deal with the existing employees of the business.

Employees and the law

The legal process for dealing with employees on a business purchase is relatively settled and simple, in that the Seller will (usually) be required to terminate the employment of all business employees and the Purchaser will then re-hire those employees it wishes to retain.

The key question for the Purchaser therefore is: What employees of the business do you want to keep and retain when you take over?

Important:

1. There is no legal obligation on a Purchaser to take on any employee unless the Purchaser wants to, that is unless they contractually agree to do so;
2. The Purchaser will usually re-employ any employee of the Seller it wishes to employ, noting that the terms and conditions of employment must be substantially similar or no less favourable to the prospective transferring employee’s existing terms of employment;
3. An employee may choose to decline a Purchaser’s offer of employment as no employee is contractually obliged to stay on and work for the Purchaser unless they accept the Purchaser’s offer of employment;
4. Where an employee accepts an offer of employment from the Purchaser, the Purchaser must decide whether to recognise the period of service with the Seller for each such employee. The Purchaser is legally obliged to recognise service for particular employment rights, including personal/carer’s leave, but can choose to recognise service for other employment rights, including annual leave. Whether the Purchaser chooses to recognise prior periods of service is a commercial decision.
5. Regardless of whether the Purchaser decides to recognise prior service, if an employee’s employment is transferring to the Purchaser, the Purchaser and the Vendor will typically negotiate adjustments to the sale price based on the value of any entitlements being transferred with the employees.

Purchaser Tip

As part of the purchase process it is important that as a Purchaser you have the ability to carry out due diligence on the employees of the business and identify:

1. The roles, responsibilities and types of employees used in the business,
2. The terms under which they are employed including salary, any award and any unusual or onerous terms including possible underpayment,
3. Length of service of each employee and entitlements to matters such as flexible working arrangements, parental leave or personal carer’s leave, and
4. Key employees being those employees who are vital or “key” to the ongoing operation and success of the business who you need to specifically lock down with written employment contracts and/or fixed term employment contracts.

We strongly recommend that Purchasers engage an employment lawyer to draft written employment agreements with all employees they wish to retain to protect their purchase, the business and so that there is a clear contractual basis for the terms of each employment moving forward.

In this Purchasers Guide we are assuming that the purchase of the business is being undertaken by way of an asset purchase. If the purchase was being undertaken by way of a share purchase, that is the purchase of all the shares in a company that owns the business, then the Purchaser automatically assumes all responsibilities (and liabilities) for all employees of the business because there is no change in the employment arrangement between the company and its employees. There is only a change in the shareholding of the company that owns the business.

What forms a Sale and Purchase Agreement for a business, is often dictated by the type or nature of the business being purchased.

An experienced business lawyer will provide advice if the business in question is of a relatively ‘standardised type’, then a ‘standardised agreement’, such as the Real Estate Institute of NSW and the Law Society of NSW standard ‘NSW Contract for the Sale of Business’ may be a good choice.

If the business being purchased is of a larger scale and/or involves a niche or complex business such as the purchase of a “rent roll business”, then a fully customised sale and purchase agreement may be necessary.

Regardless of which type of agreement is used, the following should always be considered when negotiating and preparing a sale agreement:

Purchase Price

Start with the basics. A purchase price needs to be recorded and how the purchase price is to be paid needs to be clearly stated. This is normally by way of payment in full, on the settlement date and done through the lawyers. In some case there may be vendor finance which is a loan by the Seller to the Purchaser.

Purchaser Tip

If vendor finance is offered the terms of the loan need to be considered and should be carefully documented.

Earnout or clawback clauses may be recommended to a Purchaser as a way of ensuring that the Seller is incentivised to make sure that the purchase price is fair and that the business retains its profitability following handover. Be aware if these types of clauses are to be included, they need to be properly drafted and structured.

Deposit

If, as a Purchaser, you are required to pay a deposit (which is common practice) the general rule is that it should be no more than 10% of the total purchase price and the deposit is generally held by the Seller’s business broker or the Seller’s lawyer.

Purchaser Tip

As a Purchaser always seek to have the deposit recorded as being refundable in situations where a purchase does not proceed.

Dates

Timing of the purchase needs to be agreed and a settlement date set. The parties may agree on a fixed date settlement or alternatively the settlement date may be determined by a formula based off a triggering event, often the “unconditional date” being the date all special conditions are satisfied. For example, settlement might be expressed as being the date twenty (20) business days, following the unconditional date.

Purchaser Tip

As a Purchaser make sure the proposed settlement date gives you enough time to prepare for takeover of the business and to have your funding in place.

Special Conditions

As a Purchaser it is important that you have control over certain matters and this can be achieved by the inclusion of special conditions in the agreement for sale and purchase. Special conditions (or conditions precedent) require satisfaction prior to a contract being declared unconditional and therefore binding on the parties as to settlement.

Examples of special conditions that a Purchaser may need inserted in the agreement include:

1. If you are obtaining bank funding for the purchase, the agreement should be conditional on you obtaining bank finance on terms entirely satisfactory to you.
2. If you have not conducted or wish to conduct further due diligence on the business, the agreement should be conditional on you being able to conclude your research on the business and being entirely satisfied with the outcome of such investigations.
3. If there are any special requirements relating to the business or industry that the Purchaser needs attended to on settlement by the Seller, then these should be included as special conditions.
4. If there are any consents or approvals the Purchaser requires, for example the granting of a local authority license, these should be included as a special condition.
5. If a Purchaser requires certain key employees to transfer over and sign written employment agreements, this should be included as a special condition.

Landlord’s Consent

A usual special condition is that that the agreement for sale and purchase is conditional on the Seller obtaining the consent to the assignment of the lease for the business premises to the Purchaser. As part of this process you as Purchaser would normally be required to provide the landlord with information on your ability to meet the lease obligations for example your financial status.

Purchaser Tip

As part of this process the landlord may ask you for security for performance of the lease conditions by way of a bank guarantee or cash bond, which can be the equivalent of 3 months’ rent (or more).

Usual Terms

Special Conditions will deal with matters that are particular to the business or Purchasers’ circumstances. The following terms are nearly always included in a sale and purchase agreement:

• Stock: If the business you are purchasing includes the purchase of stock from the Seller, often referred to as plus SAV or PSAV then a clause around how stock is to be treated and valued needs to be included. Generally, a stock-take is always required and there is a dispute mechanism (independent valuer) to sort any differences.

Purchaser Tip

As a Purchaser you should always make sure that there is a maximum stock amount included in the agreement which means that you as Purchaser only have an obligation to buy stock up to that value (which gives you certainty when planning your finances) and that if the Seller has more stock on hand come settlement, you would generally then have the right to pick and choose what stock to buy up to the maximum stock amount.

• Conduct of the business until completion: These clauses are generally structured so that the Seller should carry on the business in a proper and businesslike way, not incurring or making material changes to the business without obtaining the Purchaser’s consent.
• Seller warranties (or promises): As a Purchaser, it is important that you get various warranties from the Seller, in particular that the business has all appropriate licenses and consents to carry on the business and that any asset of the business being sold will not be the subject to a security charge (any loan or debt).

Purchaser Tip

Obtaining warranties from a Seller is important, however, they are no substitute for conducting your own due diligence because enforcement of warranties can be a costly and difficult process.

• Training: If you as Purchaser require training by the Seller with regards to business procedures and operations it is usual for this to be agreed and recorded in the agreement. Normally it should be provided free of charge by the Seller.
• GST: Provision for GST should always be made and generally the parties record that a business is a going concern on which GST is not payable.

Purchaser Tip

Certain conditions must be met for a business to be considered by the ATO as a going concern.

• Restraints: As Purchaser you need protections that the Seller will not compete with you in your new business following settlement. This is usually done by way of inclusion of restraints given by the Seller in the agreement, or a separate Deed of Restraint of Trade. That is the Seller will not compete with the business, or entice away any employees or clients of the business within a defined territory and for a specified time frame.

Purchaser Tip

If the Seller is a company, your lawyer should also be asking for restraints from the company directors and/or shareholders.

• Adjustments to the purchase price: A mechanism is normally inserted whereby the Seller can seek from the Purchaser adjustments to the purchase price to offset payments that the Seller has made with regards to future obligations of the business. A common example being lease payments.

Purchaser Tip

Be aware and investigate what these payments could be and may amount to during your due diligence so that you are not surprised come settlement and have the funds available to meet such obligations.

• What happens on completion: As Purchaser you will be required to pay the purchase price, and in return the Seller must provide you with possession of the business assets (and clear title to those assets with no security interests being registered against them). It is therefore important that as Purchaser, you have a clear idea of what you require from the Seller to conduct the business from the settlement date.

Purchaser Tip

Practical considerations need to be considered for example keys to the business premises, security codes, website and social media passwords.

• Default: Be aware of the consequences of failing to complete on settlement (default). There are usually penalty provisions included in the sale and purchase agreement and there will be rights to terminate the agreement and recover costs.
• Lease for the business premises: If there is an existing lease in place for the business then this is normally transferred (assigned) to the Purchaser on completion. Alternatively, the Purchaser may wish to negotiate a new lease or variations to the existing lease. Either way, provisions as to how the business lease is to be treated are included in the agreement for sale and purchase, including obtaining the consent of the landlord.

Purchaser Tip

The Seller is generally responsible for paying a landlord’s costs as to an assignment of lease, however, if you as Purchaser negotiate a new lease or changes to the existing lease then as Purchaser, you may bear the landlord’s costs for doing so.

• Employees: Provisions dealing with employees will be included and as Purchaser you need to understand those obligations.

Purchaser Tip

In this Guide we have a separate section on employees (Chapter 11) which underlines the importance of understanding the transfer of employees in the purchase process.

The Sale and Purchase Agreement is the cornerstone document when it comes to the purchase of a business. Before you sign a Sale and Purchase Agreement, always have it reviewed by an experienced business lawyer.

When all negotiations are finished and a final copy of the Sale and Purchase Agreement is agreed, the Sale and Purchase Agreement will then be exchanged.
Exchange is the process whereby the Seller and Buyer sign the Sale and Purchase Agreement and form a binding contract.

Steps in the exchange process are:

1. A final copy of the Sale and Purchase Agreement, as agreed by the Seller and Purchaser, is circulated,
2. The Seller signs one copy,
3. The Purchaser signs another copy,
4. The agreements are then exchanged with the Seller and Purchaser countersigning each other’s copy,
5. Exchange is usually undertaken through lawyers, and
6. Exchange of agreements is usually done by email with the originals to follow in the post (if required) noting that it can also be done in person.

Following exchange a binding contract is formed and the Seller and Purchaser are bound by the obligations they have agreed under the Sale and Purchase Agreement.

Following exchange of the Sale and Purchase Agreement you then need to prepare for settlement.

Preparation for settlement can be broken down into two (2) stages.

Stage 1 – Satisfaction of Special Conditions

If the Sale and Purchase Agreement you have signed is conditional upon you (or the Seller) satisfying certain Special Conditions, then you need to work your way through those conditions.

Stage 2 – Unconditional

When the Sale and Purchase Agreement is unconditional that is, all Special Conditions have been satisfied, the buyer and Seller are then obligated to settle. At this stage, as the Purchaser you will shift your focus to making sure you can meet all your requirements on settlement and making a list of practical matters to be dealt with on settlement.

With settlement approaching, it is advisable that you have a settlement checklist prepared so that you can tick off each item making sure that the Seller has complied with their obligations under the Agreement for Sale and Purchase and given you all that you need to operate the business following handover.

Settlement is the day on which ownership of the business is given by the Seller and taken by the Purchaser. In simple terms, it is the day on which the Purchaser gets the keys to the business.

Who has to do what on the settlement date will be set out in the Agreement for Sale and Purchase and the lawyers will guide their clients through this process.
The Purchaser’s key obligation on settlement is to pay the purchase price so making sure your funds are ready to go on the settlement date is critical.

Purchaser Tip

Remember that as a Purchaser you are required to pay the purchase price and also your share of any payments that the Seller has made for the business in advance (an example being rent in advance). If you are purchasing stock you also need to have funds ready to pay the stock figure following the stocktake.

Settlement will usually take place electronically via lawyers, however, it can take place in person either at the business or at the Sellers lawyer’s offices.

You are in charge and have full access to the business.

Your due diligence continues as you must continue to evaluate and make sure that all representations and warranties made by the Seller under the Sale and Purchase Agreement are correct and that there has been no breach of any Seller representation or warranty.

In addition, if the Seller agreed to provide you with post-settlement assistance for a set period of time, then the Seller must provide you with such assistance.

Any outstanding matters concerning the stock-take need to be finalised.

The business is yours, to run the way you want.

If you are a first-time Purchaser, you may be unfamiliar with the terminology used in the purchase process.

Below is a list of terms that have been referenced in this Purchasers Guide and which will help grow your knowledge and allow you to better understand the purchase process from a legal perspective.

• ABN: Australian Business Number. All businesses in Australia must have one and they are issued by the ATO.
• ACN: Australian Company Number. Every company in Australia is issued with a unique identifying number by ASIC.
• ASIC: Australian Securities and Investment Commission. This government body regulates companies and financial service providers in Australia. If you want to check on the legal status of a company and its directors, you search the ASIC registry.
• ATO Australian Tax Office: The tax man.
• Agreement for Sale and Purchase of a Business: Also referred to as the Sales Contract or the Business Sale Agreement this is the formal legal document that sets out the terms and conditions for the sale and purchase of the applicable business.
• Confidentiality Agreement: Also known as a Non-Disclosure Agreement or NDA this is a binding legal contract under which the Purchaser cannot disclose information about the business that they receive from the Seller, other than (usually) the Purchaser’s professional advisors.
• Due Diligence: Is the process whereby a Purchaser undertakes its own research to verify that the business it intends to purchase is commercially, legally and financially suitable for its purposes.
• Exchange: Refers to the exchange of a contract being the time it is signed by both parties and each party has received the others signed contract.
• EBIT: An accounting reference being Earnings Before Interest and Tax which can be expanded to EBITDA or Earnings Before Interest, Tax, Depreciation and Amortisation.
• Guarantor: A party who guarantees the obligations of another. For example, if you are using a company as your purchasing entity then a personal guarantee may be asked for by the Seller, the landlord or your bank.
• Goodwill: The value (price) attributed to the intangible or non-physical assets of a business. For example, the value attributed to a business’ brand, reputation and customer base.
• Lease: A legal contract for the lease of the business premises. A Lease will either be a Retail Lease or a Commercial Lease depending on the type of business and type of business premise.
• Heads of Agreement: Usually, a non-binding agreement entered into before the formal Agreement for Sale and Purchase that sets out the key commercial terms of the purchase.
• Information memorandum: A document prepared by the Seller or the Seller’s broker to provide prospective Purchasers with a snapshot overview of the business being sold.
• IP: Is Intellectual Property being the property of your mind or exclusive knowledge. For example, if a business develops a new product, service, process, or idea then it belongs to and is considered the business’ IP.
• PPSR: The Personal Properties Security Register is a government registry where details of all security interests over personal property (think all assets other than land) are registered. In practical terms this is the registry we search to identify if a business asset has a charge over it (security interest by a bank or lender).
• Settlement Date: Also known as the Completion Date this is the date the business is formally handed over and transferred to the Purchaser on payment of the purchase price.
• Security Interest: A security interest is the right a borrow gives a lender over a personal asset. Similar to a mortgage over land but used for personal (and business) assets such as vehicles.
• Vendor: A vendor is the Seller of the business.