A Brief Introduction to Buying or Selling a Business

Buying or selling a business is a significant commercial transaction. Whether it involves a small family business, a professional practice, a hospitality venue, a retail operation or a larger commercial enterprise, the legal and financial consequences can be substantial.

For a buyer, the focus is usually on understanding exactly what is being acquired, identifying risk and ensuring the business can continue operating after completion. For a seller, the priority is often achieving a clean sale, managing liability and ensuring the transaction proceeds efficiently.

Every business sale is different, but the following are some of the key legal and practical issues to consider.

1. Understand What Is Being Sold

The first step is to identify the structure of the transaction.

A business may be sold in different ways, including:

• the sale of business assets;

• the sale of shares in a company;

• the sale of units in a unit trust;

• the transfer of partnership interests; or

• a broader restructure involving multiple entities.

In a typical asset sale, the buyer purchases specific business assets such as goodwill, plant and equipment, stock, business names, intellectual property, customer records and key contracts. The seller usually retains the selling entity and any liabilities not expressly assumed by the buyer.

In a share sale or unit sale, the buyer acquires ownership of the entity that operates the business. This can mean the buyer takes on the entity’s history, contracts, employees, liabilities and obligations, subject to the terms of the agreement.

The transaction structure affects tax, risk, finance, transfer requirements, liability and the documents needed to complete the sale.

2. Carry Out Proper Due Diligence

Due diligence is the process of investigating the business before committing to the purchase.

For a buyer, this may involve reviewing:

• financial statements and tax records;

• sales figures and profit margins;

• leases and premises arrangements;

• customer and supplier contracts;

• employment arrangements;

• licences, permits and approvals;

• plant, equipment and stock;

• intellectual property;

• business names and domain names;

• insurance policies;

• litigation or disputes;

• debts, securities and encumbrances;

• franchise documents, if applicable; and

• any industry-specific compliance obligations.

For a seller, preparing due diligence material early can help reduce delays and give buyers greater confidence in the transaction.

Due diligence should not be limited to financial information. A business may appear profitable, but still carry significant legal or operational risk if contracts are not transferable, licences cannot be assigned, key employees may leave, or the lease does not support continued trading.

3. Use a Properly Prepared Sale Agreement

The sale agreement is the central document in the transaction.

It should clearly set out:

• what is being sold;

• the purchase price;

• any deposit payable;

• whether stock is included or valued separately;

• conditions that must be satisfied before completion;

• warranties and representations;

• apportionments and adjustments;

• employee arrangements;

• treatment of customer deposits or prepayments;

• assignment of contracts;

• transfer of intellectual property;

• lease assignment or new lease arrangements;

• restraint of trade obligations;

• confidentiality obligations;

• completion requirements; and

• what happens if a party defaults.

A short or generic agreement may not adequately deal with the commercial realities of the business. Clear drafting at the outset can help avoid disagreement about what is included in the sale and what each party must do before completion.

4. Consider the Lease and Business Premises

For many businesses, the premises are critical to goodwill and ongoing operations.

If the business operates from leased premises, the buyer will usually need either:

• an assignment of the existing lease; or

• a new lease from the landlord.

This will commonly require the landlord’s consent. The landlord may require financial information, references, guarantees, payment of legal costs and compliance with lease assignment procedures.

Before buying a business, the buyer should carefully review:

• the remaining lease term;

• options to renew;

• rent review provisions;

• outgoings and other costs;

• permitted use;

• repair and maintenance obligations;

• make good obligations;

• personal guarantees;

• assignment provisions; and

• whether the lease is suitable for the buyer’s intended operations.

A seller should also understand what obligations may continue after assignment, particularly where guarantees or existing liabilities are involved.

5. Deal Properly with Employees

Employee arrangements must be addressed carefully in any business sale.

Depending on the structure of the transaction, employees may transfer to the buyer, be offered new employment, or remain with the seller. The parties will need to consider:

• which employees are transferring;

• whether employment offers are required;

• accrued annual leave and long service leave;

• redundancy obligations;

• continuity of service;

• superannuation obligations;

• award or enterprise agreement coverage;

• employment contracts;

• restraint and confidentiality obligations; and

• payroll and employee records.

In an asset sale, employment usually does not transfer automatically. The buyer may need to offer employment to selected employees, and the seller may need to terminate employment or manage those employees who do not transfer.

Employee entitlements can also affect the purchase price through adjustments or allowances at completion.

6. Check Licences, Permits and Regulatory Requirements

Some businesses depend on licences, permits or approvals to operate.

These may include:

• food business registrations;

• liquor licences;

• health or childcare approvals;

• building, planning or occupation approvals;

• transport or trade licences;

• professional registrations;

• environmental approvals;

• franchise approvals;

• industry-specific permits; and

• local council approvals.

A buyer should confirm whether these licences can be transferred, whether new applications are required, and whether the business can continue operating during the transition.

A seller should identify early whether any regulator, franchisor, landlord, supplier or third party must approve the sale before completion.

7. Protect Goodwill, Intellectual Property and Confidential Information

The value of many businesses lies in their goodwill, brand, customer relationships and intellectual property.

The sale documents should clearly deal with assets such as:

• business names;

• trade marks;

• logos and branding;

• domain names;

• websites;

• social media accounts;

• customer lists;

• supplier lists;

• systems and processes;

• copyright material;

• software;

• recipes, designs or manuals; and

• confidential information.

It is important to confirm that the seller actually owns, or has the right to transfer, the intellectual property used in the business. This can be particularly important where websites, branding, marketing material or software have been created by external contractors.

8. Consider Restraints of Trade

A buyer will usually want protection against the seller immediately setting up a competing business and taking customers, staff or suppliers.

A restraint of trade clause may restrict the seller from competing with the business for a specified time and within a specified area. It may also restrict solicitation of customers, employees or suppliers.

Restraints must be drafted carefully. If they are too broad, they may be difficult to enforce. If they are too narrow, they may provide inadequate protection for the buyer.

For a seller, it is important to understand the practical effect of any restraint before agreeing to it.

9. Understand Tax, GST and Adjustments

Business sales often involve important tax and accounting issues.

The parties may need to consider:

• GST and whether the sale is structured as a going concern;

• income tax consequences;

• capital gains tax;

• stamp duty, where applicable;

• employee entitlement adjustments;

• stock valuation;

• apportionment of rent and outgoings;

• treatment of deposits and prepaid income;

• treatment of debtors and creditors; and

• allocation of the purchase price between assets.

The legal documents should align with the agreed tax and accounting treatment. In particular, if the sale is intended to be GST-free as the supply of a going concern, the agreement should properly record the relevant requirements.

10. Manage Completion and Transition

Completion is the point at which ownership of the business changes hands.

At completion, the parties may need to deal with:

• payment of the purchase price;

• transfer of business names;

• transfer of plant, equipment and stock;

• assignment of lease documents;

• transfer or novation of contracts;

• employee arrangements;

• handover of keys, passwords and access details;

• transfer of websites, domain names and social media accounts;

• notifications to suppliers and customers;

• release of security interests;

• delivery of records; and

• post-completion training or assistance.

Some transactions also include a transition period, during which the seller assists the buyer with introductions, systems, suppliers, staff and customers. If this is required, the scope and duration should be clearly documented.

11. Identify Security Interests and Debts

Before completion, a buyer should confirm whether any assets are subject to security interests, finance arrangements or encumbrances.

This may involve searches of the Personal Property Securities Register and other relevant records. If security interests exist, arrangements should be made for them to be released at or before completion.

A seller should ensure that any business debts, equipment finance, supplier accounts or secured obligations are properly dealt with so they do not delay settlement or create post-completion issues.

12. Plan Early and Document the Transaction Properly

Buying or selling a business involves more than agreeing on a price.

The transaction should be planned carefully, with attention to structure, due diligence, risk allocation, finance, third-party approvals, employee arrangements, lease requirements and completion mechanics.

For buyers, proper preparation can help ensure they acquire the business they expect, without unexpected liabilities or operational issues.

For sellers, early preparation can make the sale process smoother, reduce delays and improve the likelihood of completing the transaction on agreed terms.

How Spains Solicitors Can Help

Spains Solicitors assists buyers, sellers, business owners and companies with business sale and purchase transactions across New South Wales and Queensland.

We can assist with:

• negotiating and preparing sale agreements;

• reviewing business sale contracts;

• advising on asset sales, share sales and unit sales;

• conducting legal due diligence;

• advising on leases and assignments;

• dealing with employees and business assets;

• reviewing licences, permits and approvals;

• advising on restraints of trade;

• coordinating completion;

• assisting with business name and intellectual property transfers; and

• working with accountants and other advisers to progress the transaction efficiently.