Buying or Selling a Distressed Business in Australia: Risks and Protections

A distressed business sale can look like a rare opportunity: you might buy assets at a discount, step into an established customer base, or salvage value from a business that’s run into trouble.

But “distressed” almost always means there are legal and commercial risks sitting under the surface - overdue creditors, messy contracts, employee issues, unclear ownership of assets, or security interests registered on the Personal Property Securities Register (PPSR).

If you’re a buyer, seller, or advisor involved in distressed business sales in Australia, it’s worth slowing down and getting the deal structure right. With the right process and documents, you can still move quickly while protecting yourself from avoidable surprises.

Below we break down what distressed business sales usually involve, how they’re commonly structured, the due diligence checks that matter most, and the key legal terms to negotiate so the sale actually achieves what you want.

What Counts As A Distressed Business Sale (And Why It’s Different)?

In plain terms, distressed business sales are sales where the business (or its owner) is under financial pressure and needs to sell quickly.

This might happen because the business:

• can’t meet debts as they fall due (cash flow insolvency);
• is behind on rent, loan repayments, tax, or supplier invoices;
• has lost a key contract, supplier, or staff member;
• is facing litigation, a regulatory issue, or a major customer complaint;
• has had a key asset repossessed or is at risk of repossession; or
• is being sold by an external controller (for example, an administrator, receiver, or liquidator).

The core difference compared to a “normal” business sale is risk allocation and time pressure.

In many distressed deals, the seller wants:

• speed (short timelines);
• certainty (less conditionality); and
• limited ongoing liability (so they can move on).

In contrast, the buyer needs:

• clear title to what they’re buying;
• confidence they’re not inheriting hidden liabilities; and
• enough information to price the risk properly.

This tension is normal. The legal documents are where you balance it.

How Distressed Business Sales Are Usually Structured In Australia

Structuring is one of the biggest levers you have in distressed business sales. The structure affects what transfers, what liabilities you might take on, and what approvals are needed.

Asset Sale vs Share Sale

Most distressed transactions are done as an asset sale (sometimes called a business or asset purchase), rather than a share sale.

• Asset sale: You pick and choose which assets you buy (for example, equipment, stock, IP, customer list, domain name, and goodwill). You can often avoid taking on unwanted liabilities - but you still need to manage things like employee arrangements, lease assignments, and supplier contracts.
• Share sale: You buy the shares in the company that operates the business. This can be simpler operationally (contracts and assets often stay in the same entity), but you’re buying the whole corporate history - including unknown liabilities, tax exposures, and past compliance issues.

For many small businesses, asset sales are favoured because they allow a cleaner break - but they still need careful drafting to prevent liabilities sneaking in through the back door.

Going Concern Sale (GST) Considerations

Some business sales are structured as a going concern so GST may not apply to the sale price (if the requirements are met). In distressed deals, you need to be realistic about whether the business is truly being sold as a going concern (for example, whether it will continue operating, and whether key contracts and assets are transferring).

This is an area where your accountant and lawyer should be aligned early, because the sale contract needs to reflect the intended GST treatment. Sprintlaw can help with the legal documentation, but GST treatment is ultimately a tax question - you should confirm the position with your accountant or tax adviser.

Sales By Administrators, Liquidators Or Receivers

Sometimes the sale is run by an external controller. In those situations:

• the seller may only be able to give limited warranties (or none);
• the sale may be “as is, where is” (and “with all faults”); and
• speed and certainty can matter more than price.

It’s also important to understand that external-administration sales can involve additional insolvency-law complexity (including what the seller can realistically promise, how creditor interests are dealt with, and what risks can’t be fully contracted away). If you’re buying from an insolvency practitioner, you generally need tighter due diligence and a very clear understanding of what the contract does not promise you - including around title, condition, and whether any consents are required for key contracts or leases.

Vendor Finance And Earn-Outs In Distressed Deals

Vendor finance, staged payments, or earn-outs can appear in distressed business sales when:

• the buyer needs time to stabilise the business cash flow; or
• the seller is trying to maximise value despite short-term distress.

If vendor finance is used, the repayment terms and security should be carefully documented in a Vendor Finance Agreement so both sides understand exactly what happens if there’s a default.

Key Legal Risks In Distressed Business Sales (For Buyers And Sellers)

Distressed business sales often fail (or turn into disputes) because the parties focus heavily on price and speed, and not enough on what’s actually transferring and who is responsible for what.

Here are the major legal risk areas to keep front of mind.

1) PPSR And Secured Creditor Claims

One of the biggest “hidden trap” issues is security interests. A lender, supplier, or financier may have registered a security interest over business assets, such as:

• equipment and vehicles;
• stock and inventory;
• accounts receivable; and/or
• all present and after-acquired property (often under a general security agreement).

If those interests aren’t dealt with, the buyer might pay for assets that a secured creditor can still claim.

In practice, this means a buyer should consider:

• doing a PPSR search on key assets and the seller entity; and
• requiring releases or payout letters where needed.

A seller should also understand what is registered against them, because it will affect what they can sell and how sale proceeds must be applied.

When this is relevant, it can be helpful to understand what the PPSR is and why it matters to business assets.

2) Employee Entitlements And Transfer Of Staff

Employees can be a key asset in a turnaround - but employee entitlements can also be a serious liability risk if not managed properly.

In an asset sale, the buyer might:

• offer new employment to some or all staff;
• recognise past service (or not) depending on what is agreed and what the law requires; and
• need to ensure pay rates and conditions remain compliant after the sale.

For sellers, a distressed sale often involves redundancies, reduced hours, or other workforce changes leading up to completion. If redundancies occur, the business must handle entitlements properly. Even estimating liability is a starting point - a redundancy calculator can help you sense-check the numbers, but you’ll still want tailored advice for your specific situation.

In some distressed situations (especially where insolvency processes are involved), employee entitlements and “who pays what” can be more complex in practice, including the potential involvement of the Fair Entitlements Guarantee (FEG) scheme for eligible employees. Buyers and sellers should get specific advice early on how staff, accrued entitlements, and any transfer of business issues will be handled in the transaction.

If staff are continuing, it’s also important that the new arrangements are properly documented. A buyer will often want new Employment Contract documents ready to go on (or immediately after) completion, so expectations are clear from day one.

3) Leases, Landlords And Site-Control Risks

If the business relies on a physical premises, the lease is often the make-or-break issue. In a distressed scenario, the lease might have:

• arrears (rent or outgoings);
• existing breach notices;
• short remaining term (or unclear renewal rights); or
• personal guarantees that the seller can’t easily unwind.

Buyers should confirm whether the lease can be assigned (and on what terms), and whether landlord consent is required. Sellers should confirm what they need to do to deliver the lease in a condition that a buyer (and landlord) will accept.

4) Customer, Supplier And Platform Contracts

Distressed businesses often have contracts that are:

• not in writing;
• non-transferable without consent;
• terminable on short notice; or
• at risk because of past non-performance or late payments.

Buyers should identify “must-have” contracts (key suppliers, top customers, software subscriptions, distribution arrangements) and confirm whether they will transfer - and whether the counterparty is willing to continue the relationship after settlement.

5) Misleading Representations And “Too Good To Be True” Claims

When a business is distressed, there can be a temptation to oversell what’s being bought - future profits, pipeline, “exclusive” relationships, or the quality of assets.

Both sides need to be careful around misleading or deceptive conduct. If you’re negotiating marketing claims or information in an information memorandum, it helps to understand the elements of misleading or deceptive conduct and how easily disputes can arise if statements aren’t accurate and supportable.

This doesn’t mean you can’t present the business positively. It just means you should make sure the contract, disclosures, and supporting data align with what you’re saying.

Due Diligence Checklist For Distressed Business Sales (What To Check First)

In distressed business sales, you don’t always have the luxury of weeks of investigation. The goal is to do high-impact due diligence fast.

Here’s a practical checklist of what buyers (and advisors) should prioritise.

1) What Exactly Are You Buying?

Start by listing the assets and rights that matter. For example:

• equipment, vehicles, fit-out;
• stock (and what’s saleable vs obsolete);
• business name and trading name;
• website domain, social media accounts, online store;
• customer database and goodwill;
• intellectual property (logos, designs, software, content); and
• key contracts (supply, distribution, leases).

If it’s not clearly listed, you may not get it - even if everyone “assumes” it’s included.

2) Title And Encumbrances (Including PPSR)

Confirm the seller owns the assets and can transfer them. Then confirm whether any third party has rights over them (for example, through finance, hire purchase, or security agreements).

In distressed deals, “we’ll sort it out later” is not a plan. If there are encumbrances, the contract should clearly specify the payout and release mechanics before completion.

3) Financial Snapshot (Even If It’s Rough)

You may not get pristine financials. But you should still ask for enough to understand the business reality, such as:

• last 12 months revenue (and revenue by channel);
• top customers and concentration risk;
• gross margins (if there’s stock or cost of goods);
• fixed costs (rent, wages, subscriptions);
• arrears and overdue liabilities; and
• any unusual one-off expenses.

If the seller can’t provide reliable numbers, you may need to price the deal as an asset purchase with minimal goodwill - or protect yourself through stronger conditions and holdbacks.

4) Employees And Workplace Compliance

Ask for:

• a list of employees, roles, and pay rates;
• any awards or enterprise agreements that apply;
• leave balances and accrued entitlements; and
• any disputes, claims, or performance issues.

Even if you’re not taking on employees, you should understand whether the seller has properly handled entitlements up to completion - because workforce issues can disrupt operations immediately after settlement.

5) Regulatory And Consumer-Law Risk

If the business sells to consumers, check how it handles refunds, complaints, and marketing claims.

Even when you’re buying “just assets”, the way the business traded before the sale can still affect reputation, chargebacks, online reviews, and customer disputes you inherit in practice.

What Should Be In The Sale Contract For A Distressed Business Sale?

The sale contract is where distressed business sales become safe enough to proceed. Your contract needs to do two things at once:

• move the deal forward quickly; and
• clearly allocate risk so everyone knows where they stand after completion.

In Australia, this is usually documented as a business sale agreement (often an asset sale agreement) with special conditions tailored to the distressed context.

Depending on the deal, you might use a dedicated Business Sale Agreement or a more customised asset sale agreement.

Key Clauses Buyers Should Focus On

• Assets included/excluded: A clear schedule of assets (including serial numbers for equipment where possible).
• Condition of assets: Whether assets are sold “as is” or with any promises about working order.
• Clear title and releases: Seller obligations to deliver assets free of security interests, plus evidence of releases where needed.
• Employee arrangements: Who is responsible for entitlements, and what happens to staff at completion.
• Assignment/novation of key contracts: Which contracts must transfer, and what happens if consents aren’t obtained.
• Restraint provisions: If you’re buying goodwill, you typically want reasonable restraints so the seller can’t immediately compete using the same know-how and customer relationships.
• Transitional support: Short-term handover obligations (training, introductions to suppliers, access to systems).
• Limitations on warranties: In distressed sales, warranties may be limited - so buyers should decide what’s essential and price the remaining risk.

Key Clauses Sellers Should Focus On

• Purchase price certainty: How and when payments occur (including deposit arrangements and any adjustments).
• Limiting post-sale liability: Clear caps and limits on claims, especially if financial distress makes future claims unmanageable.
• Defined disclosure process: A practical disclosure regime so the buyer can’t later claim they were misled where matters were disclosed.
• Completion deliverables: A clear checklist of what needs to be delivered at settlement so there aren’t last-minute delays.
• Release arrangements with landlords and financiers: If the seller gave guarantees, they should negotiate releases wherever possible.

If you’re an advisor helping a client on either side, getting the right contract structure early reduces back-and-forth - which matters when time is the whole point of a distressed sale.

Key Takeaways

• Distressed business sales can be a genuine opportunity, but the risk profile is very different to a “normal” sale - speed and uncertainty make contract protections even more important.
• Most distressed deals are structured as asset sales so buyers can avoid unwanted liabilities, but you still need to manage key areas like employees, leases, and contract transfer.
• PPSR and secured creditor issues are a common hidden trap in distressed business sales, so checking what’s registered and ensuring releases is critical.
• Fast, focused due diligence should prioritise what you’re buying, whether the seller can transfer it, and whether the business can actually operate the day after completion.
• A well-drafted sale contract should clearly allocate risk (warranties, restraints, employee entitlements, contract consents, and completion deliverables) so the deal doesn’t create new disputes.

If you’d like help buying or selling a business as part of a distressed sale, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.