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BUYING AND SELLING A BUSINESS

There are a number of legal and commercial issues that must be addressed when buying or selling a business. When you buy or sell a business, you are essentially transferring ownership of a package of assets and property rights, as well as liabilities and debts.

This article outlines some basic considerations for buyers and sellers. It is important to obtain independent legal advice to ensure you are aware of all of your rights and obligations.

Buying a business

Before deciding to buy, you should thoroughly investigate all aspects of the business, including income and expenses, profit results and industry positioning. Questions to ask include:

• Why is the business for sale?
• What is for sale exactly?
• Is the business profitable?
• Does purchase of the business fit with your own business plans?

You should also determine the most appropriate structure for the business. Typical business structures include sole trader, partnership and company. There are numerous factors to be considered, including:

• the purpose and duration of the business,
• the number of owners and the level of liability they are prepared to assume,
• the availability of capital,
• plans for future expansion, and
• tax considerations.

A major reason for business failure is paying too much for a business. It this thus crucial that you determine a realistic value of the business and assess future profitability.

Consider the assets of the business. Assets can be tangible and intangible and can include business name, goodwill, customer lists and other confidential commercial information. Check whether fixed tangible assets, such as fixtures and equipment are included in the proposed sale. You will need to take into account depreciation and replacement costs when determining the value of fixed assets. If there is existing stock, check whether it is still saleable and determine the cost of replenishing supplies.

You should have your accountant review all financial records, including balance sheets, profit and loss statements and Business Activity Statements. Evaluate the accuracy and completeness of all business records. Sloppy record keeping should set alarm bells ringing.

Ensure that you consider profit and sales figures within an industry-specific context and compare the business finances with those of competitors. Investigate sales patterns for the business and determine the opportunities for future growth. Consider all costs involved in running the business, including hidden costs such as government charges, insurance, superannuation and other employment-related costs.

You should go through the purchase contract thoroughly with us. We will be able to advise you about the contractual obligations you are undertaking. The contract should cover the assignment of leases, licences and other rights associated with the business. You will need to clarify your obligations to employees, existing customers and other shareholders. You may also want to consider tactics to preserve the goodwill of the business, such as restraint of trade provisions to prevent the seller setting up another business in competition with yours.

Selling a business

Before you sell a business you must determine what you are actually selling. Is it just the business name, goodwill, property, fixtures and fittings, or is there more? Will you be selling remaining stock and equipment? Will you be handing over commercial secrets or customer lists? Will you want to set up another similar business or are you prepared to agree to a restraint of trade provision?

If you are going to sell a business, you obviously want to maximise your returns. Thus, it is crucial to determine an appropriate value for your business. In order to do this, you must have all financial documentation in order. Aspects to consider include:

• the value of property, including fixtures and fittings,
• income and expenses,
• market demand for the goods or services provided by the business,
• customer base and goodwill.

You must also be careful not to make claims that could be considered misleading or deceptive when describing the business’s past performance and future potential.

There are many issues to consider in drafting a contract of sale, including:

• assignment of leases, licences and contractual rights,
• transfer of liabilities,
• confidentiality agreements,
• obligations to employees and other shareholders, and
• taxation implications.

If you are selling a small business for a price of $200, 000 or less (excluding stock) you must provide the buyer with a Form 2, which provides particulars of the business for the previous three financial years. If this is not done, a contract for sale may not be binding. You may need to provide a warranty about the sales performance of the business. It is also common for there to be a hand-over process (you may, for example, agree to work as an employee for the new business owner for a limited time).

Buying or selling a business is a costly venture. However, if you are able to provide all relevant documents and information required for your sale promptly including such things as a copy of your lease, a list of plant and equipment, details of financed items of plant and equipment, including copies of finance documents, town planning permits for the premises, licences and registrations such as a liquor licence or a health registration, and copies of any relevant rate notices or other relevant outgoings.

Getting legal advice will ensure there are no nasty surprises.

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