Buying & Selling a Business
Published February 2011
Before deciding to buy a business, what are some of the most important considerations to take into account?
Before deciding to buy a business, your accountant should be consulted to determine whether or not the purchase is a good investment. This process is called “due diligence”.
You should also make sure that you have enough funds available to purchase the business and to run the business until it starts generating money.
There are many other considerations that you should also take into account, for example: Do you have the appropriate qualifications and/or experience to run the business? Are there any competitors or new developments that will affect the future financial viability of the business? Why is the vendor selling the business?
What kind of legal advice do we provide?
If you are buying a business, we will analyse the contract for sale provided by the vendor’s solicitor, which generally consists of a standard “Agreement for Sale of Business” and specially drafted conditions of sale. We will fully explain the agreement to you, noting in particular whether there are any special conditions imposed by the vendor, and what the effect of these conditions may be. We will also advise you on the most suitable legal entity to own the business: sole proprietor, partnership, corporation or trust.
If you are selling a business, we will draft the contract for sale. We will advise on the legal procedures, whether we recommend that any special conditions be included in the contract and whether financial advice is needed.
Generally no GST is payable on the sale of purchase of a business. However in some situations GST is payable and it is important that this is clarified in the contract.
What sort of information does the contract contain?
The contract will state what assets are being sold. Assets of the business may include goodwill, plant and equipment, lease, business name, stock in trade, debtors and employees.
The contract will also state the price the business is being sold for. This price is generally apportioned between goodwill, plant and equipment, and fixtures. This apportionment is important as it will affect the amount of tax you will have to pay – as a buyer and as a seller.
What is goodwill?
In legal terms, goodwill is an intangible property right. There is no concrete definition for goodwill, however it is generally thought of as the value of the reputation of the business, good location, market penetration and good relations with its suppliers, customers and employees.
Goodwill will generally by transferred to the purchaser through the hand-over of the assets and rights (including the business name) of the business. The goodwill of the business can be protected through a clause in the contract which restrains the vendor from competing with the business after completion of the sale.
What are important considerations in relation to the plant and equipment?
From a buyer’s perspective, it is important that the plant and equipment sold with the business are the property of the seller. We will make appropriate searches in this regard. We will recommend that the plant and equipment included in the contract for sale be inspected before exchange of contracts. We may also advise that a special condition be included in the contract warranting that the plant and equipment is in working order.
From the seller’s perspective, it is important to determine whether there is a mortgage or bill of sale over the item, which must be paid out at settlement.
Are the premises freehold or leased?
If you are buying or selling freehold premises with the business, the standard conveyancing process will be followed.
Usually the premises will be leased, and in this case, it must be determined whether a new lease will have to be negotiated (if it has expired or will shortly expire) or a transfer of lease needs to be arranged. It must also be established whether the fixtures are the landlord’s or the tenant’s. If the leased premises are subject to a mortgage, the mortgagee must consent to the transfer of lease.
What are the steps in a sale of business?
- Preliminary negotiations, pre-exchange searches, negotiation of special conditions, agreements signed.
- Exchange of contracts takes place at the offices of the vendor’s solicitors, where a deposit of 10% of the purchase price is usually paid. Contracts are now legally binding.
- The purchaser’s solicitor sends ‘requisitions’, which are a list of questions, to the vendor’s solicitor. If the answers turn out to be false or misleading, these will provide protection to the purchaser.
- After exchange, the vendor will generally have a number of obligations to fulfil, as stated in the contract for sale. These include: executing the necessary documents to transfer title, discharging a mortgage and acquiring a lessor’s consent to a transfer of lease.
- The contract for sale will state a completion date, when settlement will occur. Settlement generally occurs at a place nominated by the vendor. The solicitors for the buyer and the seller must have all the relevant documents signed and the appropriate cheques.