Buying A Small Business? A Legal Handover Checklist

Buying an existing business can give you a useful head start. You may be taking over an established name, a loyal customer base, a trained team and systems that have already been tested.

However, buying a business is not quite as simple as paying the purchase price and collecting the keys.

A major customer contract might need consent before it can move across. The business licence may belong to the seller rather than the business. The website could be registered under a former contractor’s account, while an important supplier may be free to walk away as soon as ownership changes.

A smooth handover starts with confirming exactly what you are buying, what can legally transfer and what needs to be dealt with before the seller steps away.

What Is Actually Changing Hands?

The structure of the sale will affect how the handover works.

In an asset sale, the buyer purchases the agreed assets of the business. These may need to be identified and transferred individually.

In a share sale, the buyer purchases the company itself. Its assets and contracts generally remain where they are, although change-of-control clauses may still be triggered. The buyer also takes on the company with its existing history and liabilities.

Whatever structure is used, the practical question is the same: will the buyer receive everything they need to keep the business operating?

The Business Sale Agreement should clearly describe what is included and what the seller plans to keep. This becomes especially important where business and personal property have become mixed together.

For example, the seller may use their personal laptop to run the business, share a software subscription with another company or personally own a vehicle carrying the business branding. Equipment at the premises may also be leased, financed or owned by someone else.

The agreement should avoid relying only on broad wording such as “all assets used in the business”. Important assets should be identified clearly, along with anything excluded from the sale.

A search of the Personal Property Securities Register may also reveal whether another party has a registered security interest over equipment, vehicles, stock, intellectual property or other personal property included in the sale. The agreement can require relevant interests to be released before or at settlement.

Will The Business Still Be Able To Operate?

Owning the equipment and brand will not help much if the buyer cannot use the premises, deal with key suppliers or legally provide the business’s services.

This is why the handover should focus on the relationships and approvals that keep the business running.

Start with the important contracts. A business may depend on agreements with customers, suppliers, distributors, referral partners or software providers. Those agreements do not necessarily move to the buyer automatically.

Some contracts allow a transfer with written consent. Others prohibit transfers or require the buyer, seller and other party to enter into a new agreement. In a share sale, the contracting company may stay the same, but a change-of-control clause could still give the other party approval or termination rights.

Not every minor agreement needs to hold up the sale. However, where the business depends heavily on one customer, supplier or platform, obtaining consent may need to be a condition that must be satisfied before settlement.

It is also worth checking whether important contracts can be terminated on short notice. A customer agreement may look valuable on paper, but it offers less certainty if the customer can leave immediately after the sale.

The same considerations apply to leased premises. If the location is central to the business, the buyer needs to know whether the landlord will agree to transfer the lease or offer a suitable new one.

The landlord may ask for information about the buyer’s experience and financial position. They may also require a new security deposit or personal guarantee. A Commercial Lease Review can help the buyer understand the remaining lease term, renewal options, transfer requirements and any existing issues before committing to the purchase.

Where the existing lease will be transferred, the parties may also need a Deed of Assignment or Transfer of Lease to formally record the change.

Licences, permits and other approvals need separate attention as well. Some may transfer, while others are attached to the seller, the premises or a particular qualified person. The buyer may need to apply for a replacement rather than relying on the seller’s existing approval.

A café buyer, for example, could receive the equipment, recipes and trading name but still be unable to open if the lease or required approvals have not been dealt with.

The sale agreement should explain which consents and approvals are needed, who will obtain them and what happens if one cannot be secured.

Does The Brand And Digital Setup Come With The Business?

A business’s most valuable assets are not always sitting in the storeroom.

Its name, website, customer-facing phone number, social media presence and online reputation may be a large part of what the buyer is paying for. The agreement should clearly identify the digital assets the seller controls and explain how access will be handed over.

A registered business name does not provide the same legal protection as a registered trade mark. It is the name under which the business trades.

Where a business name is included in an asset sale, the current holder generally needs to begin the ASIC transfer process and give the buyer a transfer number. The buyer can then register the name using their own business details.

An ABN cannot simply be transferred to a new owner in an asset sale. The buyer will usually operate the business under their own ABN. This is generally different in a share sale because the company operating the business remains the same legal entity.

Registered trade marks require their own transfer process. A written agreement should assign ownership to the buyer, and the change should then be recorded with IP Australia. Updating the register alone does not create the legal transfer.

Copyright ownership can be less obvious.

The business may use photographs, website copy, designs, software or videos created by employees, contractors or outside agencies. Before treating those materials as part of the sale, the buyer should check whether the seller actually owns the relevant rights or has a licence that can be transferred.

An IP Assignment Deed can be used to formally transfer intellectual property rights to the buyer where a transfer is required.

Digital access matters just as much as legal ownership. The seller may still be the only person with administrator access to the website, domain, online store or social media pages.

Some platforms may also restrict account transfers, meaning the handover could involve changing administrators or updating the verified business owner rather than formally assigning the account.

A proper handover should deal with passwords, recovery details, multi-factor authentication, source files and account ownership. No buyer wants to discover after settlement that the business’s main social media account is connected to the seller’s personal phone number or that nobody can access the domain registrar.

Can Customer Information Move With The Business?

A customer database may look like another business asset, but personal information cannot always be handed over in the same way as furniture or stock.

Privacy should be considered during both due diligence and the final handover.

Before settlement, a buyer may want to understand who the business’s customers are and whether they are likely to stay. That does not necessarily mean the buyer needs their names, contact details and complete account histories.

Where possible, the seller should provide aggregated or de-identified information. Identifiable customer or employee information should only be shared during due diligence where there is a proper reason and the disclosure is legally permitted.

The privacy position does not depend only on whether the transaction is described as an asset or share sale. An important question is whether the information will remain within the same business or be disclosed to a different entity as part of the assets being sold.

In a share sale, the information will generally remain with the same company, even though the company has new owners. Where customer information is transferred to a separate buyer as an asset, the sale may amount to trading in personal information and bring the transaction within the Privacy Act.

This does not mean customer information can never be transferred. However, the parties should consider what customers were originally told, including through any collection notices or Privacy Policy, whether the proposed transfer and future use are permitted, and whether consent or notice is required.

The sale agreement should also address how the information will be transferred securely, what happens to copies held by the seller after settlement and who is responsible for records that are not included in the sale.

A buyer should not assume that every customer record has moved across simply because a database file has been delivered.

What Happens To The Team?

For many small businesses, the employees are a large part of what keeps customers coming back. Their employment arrangements should not be left until the week of settlement.

In a share sale, employees will generally continue working for the same company. The shareholders have changed, but their employer has not.

In an asset sale, employees do not automatically move with the equipment and customer contracts. Their employment with the seller will generally end, and the buyer may offer some or all of them new positions.

The Fair Work Act’s transfer of business rules may apply where an employee starts working for the buyer within three months, performs the same or substantially similar work and there is a relevant connection between the old and new employers. A sale of business assets can create that connection.

Where the rules apply, the buyer may need to recognise the employee’s prior service for certain entitlements. The treatment of annual leave, redundancy, long service leave, notice and unfair dismissal can differ depending on the circumstances and whether the businesses are associated entities.

The buyer and seller should agree on which employees will receive offers, when their new employment will begin and how accrued entitlements will be handled. These arrangements may also affect the purchase price.

Where an employee’s position with the seller ends, the seller will generally need to provide notice of termination or payment instead of notice. Awards, enterprise agreements and consultation obligations should also be checked.

Where the buyer is offering employees new roles, their terms should be clearly recorded in an appropriate Employment Contract.

The buyer should understand these arrangements before speaking to the team. Telling employees that “nothing will change” can create confusion where their employer, contract or entitlements will in fact be different.

What Does A Smooth Handover Look Like?

By settlement, the legal documents and practical handover should line up.

The buyer should know exactly when control changes, what they will receive and who is responsible for payments, customer orders and problems that arise around the settlement date.

This may involve finalising transfer documents, counting stock and handing over keys, records, devices and access details. A clear settlement checklist can make sure nothing important is left sitting in the seller’s inbox, storage room or personal account.

Some of the most valuable parts of the handover may be less formal.

The seller might need to introduce the buyer to important customers, explain how orders are handled or show them the workaround everyone uses when an old system stops cooperating. Even a well-run business can depend on information that has never been written down.

Instead of relying on a loose promise that the seller will “help out”, the agreement should explain what support will be provided and for how long. This might include training sessions, customer introductions or a period during which the seller remains available to answer questions.

The agreement may also include a reasonable restraint designed to protect the goodwill the buyer has paid for. For example, the seller may agree not to immediately open an identical business nearby or approach the customers they have just sold.

The scope of any restraint should be considered carefully. Whether it is enforceable will depend on what the clause is protecting, how widely it operates and whether it goes further than reasonably necessary.

Before You Take Over

A legal handover is about more than signing the sale agreement and transferring the purchase price.

Before settlement, make sure the business’s assets, contracts, premises, approvals, intellectual property, customer information and employee arrangements have all been dealt with. Where something cannot move to the buyer, a replacement arrangement should be ready before the seller steps away.

If you are buying a small business, a legal expert can help you review the proposed handover, prepare and make sure the business you receive matches the one you agreed to buy.

If you would like a consultation on buying a small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.