Buying a business is one of the biggest decisions most owners make, and most of the risk is settled before you sign. The contract will reflect whatever you found (or didn’t find) during due diligence. Here’s what we check with clients, in the order it usually matters.
Asset sale or share sale?
Most small business purchases are one of two kinds. In an asset sale, you buy the things the business uses: equipment, stock, goodwill, the name and the key contracts. In a share sale, you buy the company that owns all of those things.
The difference matters. In a share sale, the company’s history comes with it, including tax debts, disputes and other liabilities you may not know about yet. That means more checking, and stronger warranties and indemnities from the seller. An asset sale is usually cleaner, but each contract, licence and employee has to be transferred one by one.
The lease
If the business runs from leased premises, the lease can matter as much as the price. Check:
- how long is left on the lease, and whether there are options to renew
- whether the landlord must consent to the lease being assigned to you, and what they’ll ask for (often a guarantee or a bank guarantee)
- the rent review method and the next review date
- make-good obligations at the end of the lease, which can be expensive.
In Victoria, many small retail tenancies are also covered by the Retail Leases Act 2003 (Vic), which sets rules for disclosure, assignment and rent reviews.
Key contracts
Look at the contracts the business depends on: major customers, key suppliers, franchise or distribution agreements, software and equipment leases. Some will let the other party end the contract if the business changes hands (a “change of control” clause). If a large share of revenue rests on one or two contracts, find out before you sign whether they’ll survive the sale.
Employees
Decide which employees are coming with the business, and on what terms. When employees move to a new employer as part of a sale, the transfer of business rules in Part 2-8 of the Fair Work Act 2009 (Cth) can carry their existing award or enterprise agreement across to you.
The contract should also deal with accrued annual leave and long service leave, and whether you’ll recognise each employee’s past service. These are real costs, so they should be reflected in the price.
Licences, IP and the rest
A few things are easy to miss:
- Licences and permits. Check that they can be transferred to you or reissued in your name, and how long that takes.
- Intellectual property. Make sure the seller actually owns the brand, logo, website, domain names and social media accounts, and that they’re included in the sale.
- Tax and GST. Agree how the price is allocated across the assets, and whether the sale can be treated as the GST-free supply of a going concern. Do this with your accountant before the contract is signed, not after.
Quick checklist
- Asset sale or share sale, and why
- Lease term, landlord consent and make-good costs
- Key contracts and any change of control clauses
- Which employees transfer, and their accrued entitlements
- Licences, permits and IP ownership
- Price allocation and GST, agreed with your accountant
