There are numerous issues that a purchase should consider when buying a business. These issues may vary depending on the type of business and complexity of the purchase transaction.
Purchasers must bear in mind that different types of businesses have different statutory requirements relating licensing and that these statutory requirement must be complied with before business operations commencing. As the purchase of a business requires considerable financial obligation purchasers should be satisfied that the business is not only viable but also operational.
Initially, the purchaser should ascertain whether they are purchasing the shares in a company that owns the business or they are purchasing the business and the assets. In most circumstances, there is no choice as to how the vendor sells the business, however if there is a choice then the purchaser should consider what is the best type of purchase transaction for their specific circumstance. One should consider what legal vehicle to use to purchase the business (i.e. sole trader, partnership, company etc).
Once decided as to how to buy the business the purchaser should then conduct a thorough investigation regarding the following issues:
Purchasers should allow themselves adequate time to conduct all necessary enquiries of the vendor, business, and the property on which the business operates.
If the vendor is a company, one should search the company's records about directors and secretary, registered office and mode of execution of instruments (contained in its regulations). The search will also indicate whether assets of the company are the company and possibly the business may be secured by way of a company charge.
Searched should also be conducted of the business name, trade name, and trade mark or product name included in the sale to determine whether the vendor is the registered owner. The purchaser should consider if whether it wants to trade under the same business name or a different business name.
One should search the title of the land on which the business property is situated. The search will disclose details of current lessor, covenants, and easements, other encumbrances, and mortgages (relevant to consent to the lease and possibly to its assignment).
These enquiries should include all necessary searches of local council regarding planning restrictions, which will affect the licensing requirements of the purchaser. Do any notices, orders, or proposals exist about the business or to the business premises by the local council or other statutory authority?
The purchaser should enquire with local council as to as whether the building and any alterations to the building have the necessary permits. Enquiries should look at relevant rates department as to the amount of council and water rates payable.
The lease is one of the fundamental aspects of a business purchase. Enquiries should see whether there currently exists a lease or whether the purchaser must negotiate a new lease with the landlord.
The purchaser should examine closely the terms of the lease before purchasing the business, if one exists, as the terms contained in the existing lease will bind the purchaser once the lease on transfer.
The main aspects that the purchaser should consider are:
a) Term of lease
b) Options for renewal
c) Rent payable
d) Review of Rent
e) Any restrictions on occupier including subsequent assignments
Another important aspect regarding dealing with the Landlord is that you must obtain the Landlord’s consent to have the lease transfer to the purchaser and in some circumstances the consent of the landlord’s lender. This may require that the purchaser provide the following information before the landlord consenting to the transfer of lease:
1 At least two acceptable references as to the financial circumstances of the purchaser
2 At least two acceptable references as to the business experience of the purchaser
3 At least two acceptable references as to financial circumstances and business experience of the purchaser
4 Statement of Assets & Liabilities
Once the prospective tenant provides this information the landlord cannot unreasonably withhold its consent to the transfer of the lease.
The purchaser should understand the GST consequences for purchases of a business where a lease exists and where a new lease is required between the landlord and the purchaser. The first scenario allows the business to be sold “as a going concern” and no GST is payable by the purchaser if the sale of business contract includes this provision. If one sells the business without an existing lease, then the purchaser must pay the GST.
The Purchaser should consider the licenses, permits, and authorisations required to conduct the business at the business premises and the adequacy of licenses held by the vendor.
Different businesses have varying levels of regulation depending on what type of business they conduct, such as:
Businesses handling food for instance must under the Food Act 1984, have a Food Safety Supervisor. The Supervisor must have minimum standards of food handling. The business must lodge a food safety program detailing the manner in which it handles food. This is an important legislative requirement as these details will need to be disclosed when a purchaser completes the application for transfer of food premises with its local council. It is also beneficial that a purchaser request an inspection of the business premises by an Environmental Health Officer to ascertain whether the legislative requirements are being met and whether the purchaser is required to update services if there is non-conformity.
If the business serves alcohol then Liquor Licensing laws apply. However, before transferring the liquor license, the purchaser or all directors and executives of the purchaser company must allow Victoria Police to obtain a police check before granting the transfer.
In determining, the goodwill of the business and what amount is payable for the goodwill, the purchaser should consider these issues:
1 Who on behalf of the vendor is actively engaged in conducting the business? Is there a manager or any other key employee?
2 Does the vendor have a “personal” goodwill? Is goodwill “local”?
3 Consider position and density of similar competing businesses.
4 Consider the purchaser's desire for restraint of trade in respect of vendor, vendor's directors, and/or key employees in view of legal requirements for valid restraints.
If the goodwill may be affected by the vendor operating in the same industry the purchaser should consider possible restraints required by the business:
a) Geographical restraint (e.g. area and time)
b) Dealing with existing or former customers (clients);
c) Canvassing business from existing or former customers (clients);
d) Is there any business, financial, trade or manufacturing information or secret, which should remain confidential by the vendor or by key employees?
The purchaser should consider whether tuition is required for the running of the business before or after settlement. The contract of sale should specify the nature of the tuition, and remuneration after completion of the tuition. The purchaser may want to consider retaining the vendor as consultant after settlement.
There should be enquiries about any business name, trade name, trademark, or product name used and the owned by the company. These enquiries are necessary as they demonstrate whether the vendor is the owner of the business sold.
PLANT, CHATTELS & FIXTURES
The purchaser should obtain a list of all plant and chattels owned by the vendor. The purchaser should enquire whether the plant is in working order and check the condition of the plant. One should make enquiries about whether the company selling the business has any items under chattel lease or credit purchase.
Does the business have any contractual arrangements relating to the supply of goods or services, transport, advertising, communications, franchises, distributions of the business’s goods or services and how would they be affect by the sale.
The purchaser should estimate the value of the vendor's stock. Issues about stock the purchaser will take over should be set out in the Contract of Sale. The contract should stipulate any maximum limit on total stock purchased.
What are the arrangements for payment of the vendor's debts to suppliers for stock at completion (to ensure continuity of supply to the purchaser)?
The purchaser needs to consider whether it will retain all, some or none of the employees. The purchaser should obtain details of all the employees including those it decides to retain and discharge. The information includes personal details, commencement of employment, details of long service leave and superannuation. The purchaser should consider the need for service agreements with some or all of the employees and whether the purchase of the business is conditional on the execution of the service agreements.
The purchaser should consider the existence, size, nature, and recoverability of the business’s book debts, the existence of credit, and the need for any adjustment on or after settlement.
It is imperative that purchaser do not hastily enter a Contract of Sale of Business until ample consideration is given to the issues raised. The need for such investigation is to safeguard the purchaser from buying a “lemon”. The level of enquiry required indicates the considerable financial obligation, which a purchaser assumes when buying a business. Ultimately a purchase should only take the decision to buy a business once they have obtained all the available information.
NEED MORE INFORMATION
Behan Legal assists and advises on these important issues. For an appointment, call 03 9646 0344