There are many critical legal and financial issues to consider when buying and selling a business.
Overview of buying and selling a business
Purchasing a business is a significant financial and professional decision. Financially, a business may sell for hundreds of thousands of dollars, if not millions. However, there are also non-financial qualitative aspects, like transferring staff, maintaining client relationships, honouring a reputation built over the years, and post-sale involvement commitments for the vendor that can last anywhere from 6 months to 5 years.
Appropriate legal and accounting advice is necessary before anything is signed. In a business transaction, maximising the value of your asset is a focal point. A reputable financial planner/accountant can help secure the best deal tax-wise, and an experienced business lawyer can assist both parties to limit legal issues as far as possible.
A financial advisory firm and a legal firm with a deep knowledge of the business sector are invaluable when considering this market. There is a strong demand for businesses in the healthcare sector, specifically dental practices, veterinarian practices and medical practices, primarily attributed to Australia’s ageing population, rising medical spending per capita and the quality of Australian healthcare services. The transaction itself is often documented with three or four legal contracts.
A Business Sale Agreement
From a seller’s standpoint, matters regarding the taxation consequences of the sale, transferring of employees, adjustments for employee entitlements, and adherence to statutory disclosure obligations that apply need to be considered. Without proper advice before signing the contract, a seller may receive far less for the business than intended and may remain liable for business obligations post-settlement.
A buyer must ensure full due diligence is conducted on the business. This includes checking business records such as licences, permits and registrations, plans and operations, financials, lease agreements and intellectual property. When buying a business, buyers should also consider the industry’s landscape, competitors, and marketplace dynamics before entering any contract.
A Premises Lease Contract or Premises Sale Contract
Most businesses are being conducted from commercial premises, and in most cases, the lease must be transferred and assigned to the new buyer.
Usually, the lease terms are not negotiable on the transfer and assignment of the lease, and the buyer will take the lease as it is.
It is, therefore, essential to be aware of the terms of the lease and precisely the following:
- the extent of the lease and the right to renew or end the lease
- the formula for calculating and assessing the rent
- possibility of sub-letting the premises
- limitations of local town planning laws regarding types of services or goods that can trade and trading hours
- landlords’ requirements to maintain the building the premises are in
- rights to end the lease or a temporary reduction of rent and outgoings if the premises are desecrated or destroyed
- Limitations to your ability to transfer or re-assign the lease if you choose to sell and the cost involved
- the requirement to pay rates, taxes and additional outgoings, such as utilities, repairs, and maintenance of the building throughout the lease
- types of insurance necessary, who will pay for it and who obtains it
- limitations on the removal of fixtures and fittings
- requirement on you to redecorate throughout the term and reinstate the premises when the lease expires
- consequences of failing to pay rent or other breaches of the lease
- implications of the retail shop leases legislation and whether it applies to your lease – (there is a difference between a commercial lease and a retail lease)
- payment of a security deposit
- terms of any personal guarantee and indemnity (usually required for directors of a corporate tenant)
- impact a lease may have on a franchise agreement.
There are circumstances where the business owner is also the owner of the premises prepared to sell the premises with the business. The parties will then enter into a commercial contract of sale, and they must be aware of the following (this is not an exclusive list):
Cooling Off Periods
Unlike residential contracts, which offer a five-day cooling-off period that allows a buyer to terminate for any reason within the cooling-off period, there is no such cooling-off period for commercial contracts.
Use of Land
As commercial property value is linked to its usage, it is vitally important to ensure the use of the land is permitted by the local government and that all appropriate approvals have been obtained for such use.
Aside from the physical land and buildings that will be transferred, more documents must be collected and reviewed to complete a commercial contract. These can include a Certificate of Classification for the building, plans and sketches relating to construction, and documents to enable tax management (e.g. depreciation) for the buildings.
Financing and Settlement Periods
Typically, a residential contract is conducted within a 30-day timeframe. However, with commercial contracts, the timeframes for settlement are generally extended because of the level of scrutiny required. Consequently, buyers will seek more time to acquire finance and conduct their due diligence, and settlement is more likely to be more than 30 days. In addition, a settlement will take place simultaneously with the business settlement, and time frames should follow each other.
Particular attention must be applied to make sure that any purchase price agreed upon has contemplated the application of GST. GST can be applicable in certain situations and maybe exempt in others. Either way, before signing a contract, advice needs to be acquired to ensure utmost understanding and assurance that the price includes GST or not. Alternatively, a buyer may need to find an extra 10% of the purchase price, or a seller could get 10% less than expected. If the premises are sold as part of the business, it will be a going concern, and therefore no GST will be payable.
A buyer needs to be appropriately advised before signing a contract to insist on a due diligence period during which the buyer can consider all issues concerning the business. This period will allow a buyer to terminate the contract without providing any reasons, as purchasing a commercial property is varied. This ensures scope to conduct investigations or enquiries of the property for its intended use. This can be contained in the contract. The purpose of such investigations is that if a buyer is not satisfied with the results of their inquiries, they can cease the contract and be reimbursed their deposit paid.
Vogue Advisory Group – helping professionals buy and sell efficiently
When buying or selling a business, there is nothing necessarily in a place that regulates the process. As a result, failing to obtain the right financial and legal advice can be risky. If you consider buying or selling a business, contact us, and one of our advisors will assist you.