Buying a Business? Critical Commercial & Workplace Considerations Part 1
Buying a new business can be an exciting experience - whether it’s your first or just one of many. But even for experienced business people there are plenty of critical issues to consider to ensure the transaction proceeds smoothly. Get the right advice early in the transaction and you’ll get your new business off to the best possible start.
In this two part CG Law Bulletin we’ll examine firstly the business, due diligence and restraint issues while in part two we’ll examine the workplace and employment issues that you need to get right.
Prior to signing any business contract, both accounting and legal advice should be sought. Working together, your accountant and lawyer will ensure that the transaction is structured in order to minimise the GST and stamp duty payable. Additionally, purchasing the business in the correct entity from the outset (be that a personal, company or trust structure) can minimise the risk which the business poses to your personal assets and the tax payable by your business moving forward.
Businesses are like anything else – the more you know about it, the better the position you will be in. Negotiating the inclusion of a due diligence clause in the contract will give you time to obtain further information from the business owner and provides a risk-free exit strategy in the event that something comes to light which makes you re-consider the purchase.
Understanding the approvals, licences and permits required to conduct your new business is also essential. The standard business sale contract puts the onus on the buyer to ensure all necessary approvals are in place. These investigations can be undertaken during a due diligence period and once again, termination is then possible should the necessary approvals not be in place and these approvals can range from a use approval from the local government (to use the premises for the business use) to a Food Act licence or liquor licence.
A thorough investigation of the assets needs to be undertaken – whether these assets comprise intellectual property (like a trademark or important domain name through which the business operates) or a key piece of equipment, it is always preferable to discover prior to settlement that a piece of equipment is faulty or the rights to a trademark are not actually held by the seller, and require the seller to rectify this before settlement, than to identify the fault after settlement and have to consider whether post-settlement litigation is worth the cost.
RESTRAINT OF THE SELLER
Given that you are paying a portion of the purchase price for the goodwill of the business, it is vital that the seller be prevented from setting up a competing business and taking your customers, when you have paid for their patronage.
An appropriate restraint clause must be incorporated into the contract – while the standard business sale contract does contain a restraint condition, should the seller be a company, it is vital to obtain the directors’ execution of a deed of restraint at settlement, to ensure they are also bound by the restraint.
Depending on the seller’s business structure (for example, a husband and wife team who run a business through a company, of which only the wife is actually a director and shareholder), a key person like the husband is not bound by the standard restraint of trade clause and a tailored special condition needs to be inserted before the contract is signed.
PART 2 – COMING SOON
Watch out for Part 2 of our Buying a Business Legal Bulletin which will discuss the workplace and employment issues that may arise.
For advice on the due diligence, purchase or workplace issues of a business contact Clifford Gouldson Lawyers.