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Investing in a business can be an exciting way to build wealth, grow your professional network, and become more involved in Australia’s thriving small business landscape. Whether you’re a first-time investor or looking to add another enterprise to your portfolio, taking the leap to invest in a business involves more than spotting a great opportunity – it also comes with unique legal responsibilities and risks.
If you’re considering how to invest in a business, it’s crucial to understand the legal process from the outset. Proper planning and compliance not only protect your investment but also contribute to the success of the business you’re getting involved with. In this guide, we’ll walk you through the key steps, highlight important compliance requirements, and equip you with an investor’s legal checklist for businesses in Australia.
Thinking of putting your money behind a promising business? Keep reading to learn how to do it with confidence – and legal peace of mind.
What Does It Mean To Invest In A Business?
Before diving in, let’s define what we mean when we talk about “investing in a business.” In Australia, this often means purchasing shares or equity in an existing company, buying into a partnership, acquiring all or part of a small business, or even becoming a silent investor. You might also consider buying a business outright or joining as a co-founder during early-stage fundraising.
Each approach has its own risks and rewards. What they all share is the need for legal due diligence, sound contracts, and a clear understanding of your rights and obligations as an investor.
How To Invest In A Business: The Step-By-Step Legal Roadmap
Investing in a business is a process that can be broken down into several key stages. Let’s explore the essential legal steps you should take before, during, and after making your investment.
1. Assess The Opportunity And Conduct Due Diligence
The first step in investing in any business is conducting legal and financial due diligence. This helps you understand exactly what you’re investing in, and exposes any hidden liabilities or issues.
- Review financial records: Balance sheets, income statements, tax filings, and cash flow forecasts.
- Check company registrations and ABN/ACN status.
- Inspect key contracts: Supplier agreements, leases, loan agreements, employment contracts, and customer Terms & Conditions.
- Assess intellectual property (IP): Examine ownership and protection of trade marks, patents, domain names, copyright, and other assets.
- Identify compliance issues: Confirm the business is up to date with ASIC filings, tax, workplace safety, and licensing requirements.
- Check for litigation: Are there any ongoing or potential legal disputes?
If you’re unfamiliar with the due diligence process, engaging a legal expert ensures no vital details are overlooked.
2. Understand And Agree On The Investment Structure
How you invest in a business will shape your risks, rights, and returns. The main structures include:
- Equity investment: Buying shares in a company. Common for startups or growing SMEs, this gives you a legal stake in the business (and often voting rights).
- Debt investment: Lending funds under a formal loan agreement, with interest, security, and repayment terms set out clearly.
- Convertible notes: A hybrid of debt and equity, where your loan can convert into shares later – often used in startup fundraising.
- Partnership or joint venture: Entering into a business partnership or joint venture, typically documented with a Joint Venture Agreement or Partnership Agreement.
- Buying an existing business: Purchasing business assets or shares via a Business Sale Agreement.
Each option has different tax and legal consequences. It’s wise to get advice on which suits your risk appetite, objectives, and relationship with the other parties.
3. Document The Deal With Robust Legal Agreements
No matter how well you know the people involved, always formalise the investment through signed legal documentation. This is your main shield if things go wrong or expectations shift.
- Shareholders Agreement: Critical for any equity investor – this outlines decision-making powers, dividend policy, transfer of shares, exit options, dispute resolution, and more. Learn more about Shareholders Agreements here.
- Subscription or Purchase Agreement: Documents the details of your investment, including the amount, share price, payment terms, warranties, and representations.
- Loan Agreement: Sets out repayment, interest, security, and other terms if you’re acting as a lender.
- Convertible Note or SAFE Agreement: Used for convertible investments – see our SAFE Note Guide.
- Business Sale Agreement: If purchasing a whole business, this covers assets, liabilities, purchase price, vendor obligations, and more. Read a step-by-step guide on business purchases.
- Confidentiality or Non-Disclosure Agreement (NDA): Protects sensitive business info before, during, and after negotiations.
Having these documents tailored to your situation (rather than using templates) is the best way to prevent misunderstandings and avoid future disputes.
4. Register Changes With ASIC And Other Authorities
When new shareholders come on board, or business ownership changes, this must be reported to the Australian Securities and Investments Commission (ASIC) and other relevant bodies. This includes updating the:
- Company’s share register
- List of directors or officeholders
- Membership details if investing in a partnership or joint venture
If buying an established company or registering a new shareholding, there may also be directors’ declarations and legal notices to file.
5. Set Up Ongoing Legal Compliance
Once the investment is complete, staying compliant is an essential part of managing risk. Key compliance considerations include:
- Filing annual returns and ASIC annual reviews
- Meeting corporate governance obligations
- Maintaining accurate financial records
- Compliance with Australian Consumer Law (ACL), especially if the business sells goods or services
- Employment law compliance if the business hires staff
- Renewing any necessary licences, permits, or IP registrations
Failure to keep up with these requirements can put your investment (and the business itself) at risk.
Do I Need To Choose A Business Structure Before Investing?
Absolutely. Before you invest in business, you need to understand (or help establish) the right structure for the business itself. This affects your level of control, your liability, your tax obligations, and how profits are shared.
- Sole Trader: Simple, but unlimited personal liability and usually not suitable for outside investors.
- Partnership: Two or more people run the business together. All partners are personally liable for debts and obligations unless the partnership is set up as a limited partnership.
- Company (Pty Ltd): The most common structure for serious business investment. It limits your liability (your personal assets are separate from company debts) and allows for clear shareholding arrangements.
- Trust: Can be used for certain investments (especially with family or complex ownership), but administration is more complex.
If you’re investing in a startup, an established company, or buying part of a business, seek professional advice so you’re clear on what you’re getting into. You can explore our guide to different business structures for more detail.
What Laws And Regulations Apply When Investing In A Business?
Investing in a business in Australia means you need to be aware of a core set of legal obligations, for both you and the business you’re investing in. The main areas to focus on include:
Business Registration And Corporate Law
Businesses must hold a valid Australian Business Number (ABN). Companies must be registered with ASIC, comply with the Corporations Act 2001, and keep records of all shareholdings, decisions, and compliance filings.
Contracts And Agreements
All investments should be documented with clear contracts – whether that’s a Shareholders Agreement, Subscription Agreement, or Business Sale Agreement. These contracts protect everyone’s interests and set legally enforceable expectations.
Australian Consumer Law (ACL)
If the business deals with customers, it must comply with the ACL. This covers product safety, advertising and sales practices, returns and refunds, and more.
Employment Law
If you become an owner or director of a business with employees, you need to ensure compliance with national employment standards, modern awards, and workplace safety laws. This involves having compliant employment contracts, policies, and recordkeeping.
Intellectual Property (IP) Law
Protecting (and not infringing) intellectual property is critical. If you’re buying a business, check that trade marks and other IP have been registered and assigned. As a new investor, you may want to help the business register its trade marks or secure agreements with contractors on IP ownership.
Privacy And Data Protection
Businesses that collect customer information (such as through a website or email list) must comply with the Privacy Act 1988. A compliant Privacy Policy is a must-have.
Licences And Industry-Specific Regulation
Many businesses require industry-specific licences (such as food or alcohol licences, or accreditations for health or childcare businesses). Confirm these are in place and up-to-date before investing.
Taxation And GST
Depending on the nature and size of the business, it may need to register for GST or other taxes. Make sure the business’s tax affairs are in order, to avoid nasty surprises for investors.
What Legal Documents Will I Need To Invest In A Business?
The specific legal documents you’ll need depend on how you invest, but here’s a helpful checklist of common agreements and policies most investors should review or implement:
- Shareholders Agreement: Covers rights and duties of owners, dispute resolution, and process for buying/selling shares.
- Subscription or Sale Agreement: Details your investment, price, payment, and agreed representations.
- Loan Agreement: Required for any investment structured as debt, with interest and security terms.
- Non-Disclosure Agreement (NDA): Protects confidential commercial information during negotiations.
- Business Sale Agreement or Asset Sale Agreement: If buying a whole business or substantial part of it.
- Employment Contracts: If you become responsible for staff.
- Intellectual Property Assignment or Licence: Ensures IP is securely transferred to or accessible by the company.
- Privacy Policy: For businesses collecting personal information from customers or users.
Not every investor needs all these documents, but most transactions require several, tailored to the particulars of the deal and business. To avoid costly legal disputes, have these drafted or reviewed by a legal expert.
Is Buying A Business Or Franchise The Right Path For You?
For many investors, buying an existing business – or investing in a franchise – can seem less risky than launching something from scratch. This path may come with established systems, an existing customer base, and trusted suppliers. However, it also comes with its own set of legal due diligence hurdles.
If buying a business, pay close attention to the contract of sale, transfer of assets, and employee entitlements. For franchises, you’ll be required to follow the Franchising Code of Conduct, and should review the Franchise Disclosure Document and Franchise Agreement very carefully.
Thorough legal review before signing is essential to ensure you’re clear on your rights, obligations, and what exactly you’re purchasing. Learn more in our guide to buying a business in Australia.
Key Takeaways: Investing In An Australian Business
- Investing in a business in Australia requires careful legal due diligence to protect your interests and money.
- The right investment structure (shares, loan, partnership, purchase) directly shapes your liabilities, rights, and returns – seek advice before committing.
- Solid, customised legal agreements (like a Shareholders Agreement, Loan Agreement, or Business Sale Agreement) are essential to document your deal and avoid disputes.
- Staying compliant with ASIC, tax, employment, consumer law, and privacy rules is crucial for successful business investment.
- Buying an established business or franchise can be an easier path for some, but requires detailed legal review and a clear understanding of regulatory obligations.
- Getting early legal advice saves stress (and cost) in the long run and ensures your investment stands on a solid legal foundation.
If you’d like a consultation on how to invest in a business in Australia – or want experienced legal experts to review an investment opportunity – reach out to us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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