Buying an existing business can be exciting. However, it is important to properly understand the purchase of business process and related legal issues to avoid complications down the track. This article explains some key legal considerations when buying a business to inform your transaction.
1. Are you buying assets or shares?
Buying a business can either occur through purchasing the assets or shares of the business. The difference is explained below.
- Asset sale: you purchase some or all of the assets owned by the business. This may include things like the trading stock, equipment, goodwill, trade marks and intellectual property of the business. Although you purchase the assets of the business, the seller holds on to ownership of the actual company.
- Share sale: you purchase the entire ownership of the company. This means you purchase the company itself, its shares and all its assets and liabilities.
Whether an asset or share sale is more appropriate for you will depend on the circumstances. It may be helpful to talk to a legal professional if you are unsure on which to choose, as there are different taxation, commercial and legal implications for each type of transaction.
2. Have you done your due diligence?
Due diligence is one of the most important aspects when buying a business. This means undertaking thorough research of the business you are looking to buy. Conducting due diligence often requires consideration of the following aspects of the business:
- Financial records, including business activity statements (BAS), balance sheets, cash flow statements and tax returns
- Assets, including trading stock, equipment, goodwill and intellectual property such as domain names, trade marks and copyright.
- Liabilities, including any outstanding debts on registered personal property
- Licences and permits, such as liquor licences.
- Legal documents currently in place, such as lease agreements and supplier contracts.
- Operational aspects such as business processes and employment records.
3. Do you have all the required legal documents?
- Sale Agreement: You will need a detailed agreement outlining the sale and purchase transaction, whether you are buying assets or shares of the business.
- Lease Documents: You will need to have the formal lease documents for the business premises. In most cases, this will require a transfer of lease to you as the new tenant of the premises.
- Memorandum of Understanding: It may be helpful to have a memorandum of understanding between you and the seller prior to entering a formal sale agreement. This document outlines the essential terms of the transaction and can be negotiated before a formal agreement is entered.
- Non-Disclosure Agreement: Buying a business can involve many confidential documents such as financial and employee records. It may be helpful to enter a Non-Disclosure Agreement (NDA) to require the parties to use such information only for the purposes of the sale and otherwise keep it confidential.
4. What will happen to the employees?
When buying a business it is important to consider what will happen to the existing employees of the business. A change in business ownership does not necessarily mean that employees are automatically transferred to you as the new owner. Generally, whether employees are transferred will depend on the nature of the sale transaction.
- Asset sale: Existing employees do not transfer to you. If you wish to retain certain employees, you will need to provide them with a new offer of employment. Otherwise, their employment will be terminated and they may be entitled to redundancy pay.
- Share sale: Existing employees will transfer to you and you are now responsible for employee entitlements such as annual leave and correct wages.
- You can either purchase the assets or shares when buying a business.
- An asset sale involves purchasing some or all of the business assets such as equipment, goodwill and intellectual property.
- A share sale means purchasing the entire ownership of the company, including its assets and liabilities.
- Due diligence must be undertaken prior to buying a business. This includes researching the financial records, assets and liabilities of the business.
- Ensure you have all the required legal documents for buying a business, particularly the sale agreement and lease documents.
- Consider whether existing employees are transferred to the new business or whether their employment will be terminated.
How can Gladwin Legal help?
Gladwin Legal are experts in sale and purchase of business. We can help with:
- Drafting or reviewing your sale of business agreement
- Drafting, negotiating or reviewing your commercial or retail lease
- Undertaking due diligence prior to your business purchase
- Providing tailored advice on your sale transaction and assessing your risks and liabilities
This article was written by Ruth Ong.