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Buying a business is an exciting process but it is important to be across the entire process. Where there are contracts, leases and employees involved, you want to make sure you’re doing it right.
In this article, we’ll walk you through the legal process of Buying A Business’ Assets.
Acquiring a business’ assets is beneficial as you have access to an already established brand name, goodwill, existing customer base, suppliers and employees.
If you are buying a business, it is important that you ensure that everything is in order before you pay the purchase price. It can be a complex process, and it’s a good idea to seek legal advice to ensure you get a good deal (and that everything is done properly).
What To Do Before Signing The Contract
Let’s walk you through the key steps you’ll need to take before actually signing anything!
Undertake Due Diligence
Before you buy a business, you want to make sure you do a background check in the business that you’re buying so you know exactly what you’re getting into.
Often, this means doing the necessary due diligence on the business that you’re purchasing. Does the business actually own the assets you’re buying? Are there any ongoing debts on those assets that you might be taking over?
It’s always a good idea to do this as early as possible. You can’t hold the seller responsible later if you didn’t check these things yourself.
When buying an entire business and their assets involved, it’s a good idea to do your homework before committing to the purchase.
You can read more about the due diligence process here.
Make Sure A Lawyer Reviews Your Contract
Before you buy a business, you’ll often receive a contract of sale, often called a Business Sale Agreement.
Generally, this contract is prepared by the vendor or the seller of the business. Before you sign it, it’s important to make sure that you get a lawyer to review the Business Sale Agreement so you understand what it means for you.
When considering the Business Sale Agreement, the buyer and seller will often have competing objectives.
Most likely, the seller will try to reduce risk for themselves and try not to promise anything, whereas the buyer may want a competition covenant in place to make sure the seller can’t compete with them after the business sale.
Depending on the bargaining positions of the parties and their risk appetite, these types of terms are heavily negotiated, and often it’s a matter of parties meeting somewhere in the middle.
This is why it’s important to get an experienced lawyer to identify any risks that you may be exposed to when purchasing the business’ assets. You don’t want to walk away post-settlement having agreed to something you didn’t intend on taking up.
The lawyer will also walk you through what else you need to know during the process so you understand exactly what you’re getting into.
A Business Sale Agreement will generally cover standard terms around transferring payment, restraints of trade and transferring employees.
However, the seller might also prepare ‘special conditions’ in the Business Sale Agreement, containing specific terms relevant to your transaction. For example, some business transactions might involve extra terms around training (where the seller trains the buyers in how to run their business operations) to help the transition run smoothly.
Transfer Leases
When purchasing all the assets in a business, you’ll probably also need to ‘inherit’ whatever lease the previous business owner had signed. This is commonly referred to as a ‘transfer’ of the commercial or retail lease.
Before you sign on board to transfer this lease to your business, you need to make sure you understand the terms of the lease. Ask yourself:
- Can you afford the lease payments?
- How long will you be bound to the lease?
- What other terms in the lease might you need to be aware of?
As such, it’s important to have a lawyer look over the lease before you sign (once signed, it’ll be very hard to re-negotiate the lease without breaking the contract).
Once a lawyer reviews your commercial lease, you’ll be in a better position to decide whether you’re happy for the lease to be transferred to you. In some instances, you can also start a fresh new lease and negotiate the terms with the landlord.
Conduct Searches
Aside from contracts and leases, a lawyer will need to also assist you by making sure everything is in order before the business is sold to you.
These are generally called ‘searches’, which include:
- Company and business name search: You can search ‘Organisations and Business Names’ search on ASIC Connect
- Trade marks search: If you are purchasing any trade marks, it is important to make sure that the ownership is transferred to your new business via IP Australia
- PPSR search: This is to ensure that there are no security interests over any assets you are purchasing via the PPSR (such as any loans that hold those assets as security)
- Continuing agreements: You need to check whether the seller has any signed contracts with important stakeholders, which need to be transferred to your business.
Transferring Employees
When you’re buying the business, you’ll need to ask yourself if you want to keep the existing employees currently employed with the business.
In most cases, buyers will want to keep the business’ employees so that they don’t have to train new staff. Especially if the business has a great reputation in the community, a very obvious change in management might affect the business operationally.
To “transfer” employees, the seller will need to formally terminate the employment agreements they have with those employees. Under the Business Sale Agreement, the sellers might be required to provide written notice of this termination prior to settlement.
Generally business sale agreements require the buyer to make employees offers with similar terms to their current employment.
From there, you’ll then have to prepare new Employment Agreements for these staff members for them to be employed by your business. And, you’ll have to look into whether any Modern Awards apply to your employees.
Learn more about transferring employees here.
How To Prepare For Settlement
At this point, when you’ve signed the contract and are awaiting your settlement date, there are a number of things that you must do.
You firstly may need a Deed of Assignment and Variation of Lease if a commercial lease is involved. This is the contract where the vendor assigns the purchaser of the business the lease, and the tenant then agrees to assume the rights and obligations of the lease, as if they were the original tenant.
As the purchaser, you may also need to complete any other obligations you may have under the Business Sale Agreement (such as any obligations that are set out in the special conditions).
During this time, it is also important to get advice in relation to any security interests that may affect the assets, and that all of them are removed from the PPSR at settlement.
The settlement date should also be scheduled, and the buyer must consider adjustments to stock and employee entitlements (if they are being transferred across).
What To Do At Settlement
Settlement is the point at which the legal ownership transfers from the seller to the buyer. It’s usually a quick process.
Once both parties have completed everything required for settlement to happen, here’s what you should expect on settlement day:
- Meet at the agreed upon settlement location: This could be the location of the business (in the case of brick and mortar businesses), online (if the buyer and seller are in different states) or the solicitor’s office, for example.
- At this point, the buyer will also pay the remainder of the purchase price. This will be an adjusted amount, taking into account any variables like employee wages, rent and outgoings, stock, etc.
What To Do After Settlement
At this point, it is important to attend to post-settlement obligations (if any) you have under the Business Sale Agreement.
This will generally include lodging applications for the transfer of registration of business name, licences and permits (if applicable), trade marks, security interests, etc.
There may also be a handover period where the seller must complete certain tasks under the Agreement.
The handover period could involve the following:
- Assisting the buyer with entering into contracts with third parties (such as suppliers) either by assigning contracts or introducing them
- Introducing the buyer to the employees if they’re being transferred across
- Providing training to the buyer
- Handing over keys, securities, system access, etc.
- Notifying utilities suppliers, banks, industry associations, etc.
What If Something Goes Wrong?
As a buyer, there are a variety of things that could go wrong if you don’t do your research—from misrepresentations of the business’ profits to undisclosed disputes with suppliers or employees.
A seller makes many representations and warranties when selling their business. If, during the business sale process, the buyer has completed their due diligence and identified liabilities, an indemnification clause can be included where the seller will still remain financially responsible for the liability.
These indemnification clauses can also protect the buyer in the event of misrepresentations regarding the business. It’s important to have a well-drafted contract in these circumstances.
Misleading and deceptive conduct under the Australian Consumer Law can also apply and protect buyers in certain scenarios.
Need Help?
Navigating this process can be a lengthy and daunting task. It is important to make sure a lawyer reviews or drafts your Business Sale Agreement and/or Commercial Lease.
If things go wrong, repercussions can arise further down the line. It is also important to make sure you do your due diligence before purchasing a business’ assets to make sure you’re not exposed to any liabilities.
Sprintlaw has helped many clients buy and sell businesses. And even though we’re a completely online law firm, we’ll still assist you throughout the entire process and make it as smooth as possible.
If you’re looking to buy a business, get in touch with us at team@sprintlaw.com.au or on 1800 730 617 to find out how we can help you! We’ve available any time for a free, no-obligations chat.
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