One of the most important stages of a business acquisition occurs before the contract is signed.

Once a buyer enters into a binding contract, their ability to withdraw from the transaction or renegotiate its terms will usually depend upon the conditions contained in that contract. It is therefore important to understand exactly what is being purchased and whether the contract gives the buyer appropriate protections before committing to the transaction.

KMB Legal's Gold Coast commercial lawyers assist business owners and purchasers with business acquisitions, contract reviews, due diligence and settlement.

Here are some of the key matters a buyer should consider.

1. What exactly are you buying?

The first question is whether the transaction involves purchasing the assets of the business or acquiring the shares in the company that operates the business.

These structures can have very different consequences.

In an asset sale, the contract should identify which assets are being transferred. These may include:

• plant and equipment;
• stock;
• intellectual property;
• business names;
• customer databases;
• telephone numbers and websites;
• goodwill;
• licences or permits, where transferable;
• contracts; and
• other assets used in operating the business.

A share purchase involves acquiring ownership of the company itself. This requires careful investigation because the company generally continues to hold its existing assets and liabilities after the shares change hands.

For a more detailed comparison, read Buying a Business: Assets vs Shares — What's the Difference?

2. Have you checked the financial information?

The purchase price of a business is often influenced heavily by its historical and expected profitability.

Before committing to the transaction, a buyer should consider the financial information available and obtain appropriate accounting advice.

Depending upon the business, relevant documents may include:

• profit and loss statements;
• balance sheets;
• tax returns;
• Business Activity Statements;
• sales records;
• payroll information;
• bank or merchant records;
• aged debtors and creditors;
• stock records; and
• details of significant expenses.

You should review a business's financial records, operations and legal documents as part of due diligence before signing a contract.

The figures provided by a seller should also be considered in the context of the business itself. For example, a buyer may need to understand whether revenue depends heavily on one customer, whether particular expenses are likely to increase or whether the owner's personal involvement has affected reported profitability

.

3. Should the contract be subject to due diligence?

A buyer may not always have sufficient information to complete comprehensive due diligence before the contract is signed.

In those circumstances, consideration should be given to whether the contract should contain a due diligence condition.

The wording matters.

A properly drafted condition should address issues such as:

• the period available for due diligence;
• the information the seller must provide;
• what aspects of the business can be investigated;
• whether the buyer must be satisfied with the results;
• how the buyer exercises any right to terminate; and
• what happens to the deposit if the condition is not satisfied.

A due diligence condition should not simply be assumed to provide a general right to change your mind.

Read our guide to Due Diligence When Buying a Business in Queensland for more information.

4. Is there a lease?

For many businesses, the premises are critical to the value of the business.

If the seller leases the premises, the buyer should determine whether the existing lease will be assigned or whether the landlord will grant a new lease.

Before signing the business sale contract, consider matters including:

• the remaining lease term;
• options to renew;
• current rent;
• rent review provisions;
• outgoings;
• permitted use;
• security or bank guarantee requirements;
• make-good obligations;
• redevelopment or relocation provisions;
• landlord consent requirements; and
• whether the premises have the approvals required for the intended business use.

It is important that ycu heck whether the landlord's written approval has been obtained for an assignment and whether the proposed use of the premises is permitted.

Where the premises are a retail shop governed by Queensland's Retail Shop Leases Act 1994, statutory disclosure requirements can also apply to an assignment. For example, the approved Form 9 guidance states that where the assignment occurs in connection with the sale of the retail business, the assignor's disclosure statement must generally be given to the prospective assignee at least seven days before the assignee enters into the business sale contract, subject to the Act's provisions concerning disclosure.

For more information, read Commercial Leases in Queensland.

5. What happens to the employees?

Employees should be considered before the contract is signed rather than left until settlement.

Questions may include:

• which employees will be offered employment by the buyer;
• their current wages and conditions;
• accrued leave and other entitlements;
• whether an award or enterprise agreement applies;
• whether prior service must be recognised;
• how employee entitlements are dealt with between buyer and seller; and
• whether adjustments or indemnities are required under the contract.

The Fair Work Ombudsman explains that a transfer of business can occur where an employee starts with the new employer within three months, performs the same or substantially the same work and there is the required connection between the employers. Different rules apply to recognition of various employee entitlements.

These issues can affect the actual cost of acquiring the business.

6. Are important contracts transferable?

A business may depend upon contracts with:

• customers;
• suppliers;
• distributors;
• franchise networks;
• software providers;
• payment providers; or
• other commercial partners.

A buyer should determine whether these contracts will automatically continue, can be assigned or require the other party's consent.

A profitable business may be considerably less valuable if an important customer or supplier contract cannot be transferred to the buyer.

7. What licences, permits and approvals does the business need?

Some businesses cannot legally operate without particular licences, registrations or regulatory approvals.

The buyer should determine:

• what licences and permits are required;
• whether they are current;
• whether they can be transferred;
• whether the buyer must apply for new approvals; and
• whether completion should depend upon those approvals being obtained.

Government guidance specifically identifies licences and permits as matters buyers should investigate during due diligence.

This can be particularly important for businesses operating in regulated industries.

8. Is the purchase price allocated between different assets?

The contract may allocate the purchase price between components such as:

• goodwill;
• plant and equipment;
• stock;
• intellectual property; and
• other business assets.

This allocation should not be treated merely as a drafting exercise.

It can have taxation, accounting and duty consequences for both buyer and seller, so appropriate accounting and taxation advice should be obtained before the allocation is agreed.

9. Will transfer duty apply?

Buying a Queensland business can have transfer duty implications.

The Queensland Revenue Office states that transfer duty may apply to the acquisition of Queensland business assets. Relevant business assets can include goodwill, statutory business licences, business names, franchise rights, intellectual property, supply rights and certain personal property.

The duty consequences depend upon the particular transaction and assets involved.

Buyers should therefore understand the potential duty liability before committing to the purchase price.

10. What happens to the stock?

If stock is being purchased in addition to the agreed business purchase price, the contract should specify how it will be valued.

For example:

• Is stock included in the purchase price?
• Is it payable separately?
• Is there a maximum stock value?
• Who conducts the stocktake?
• How are obsolete or damaged items treated?
• When is the stocktake undertaken?

A business advertised at a particular purchase price can ultimately require a significantly larger payment if substantial stock is payable in addition to that amount.

11. What warranties is the seller giving?

A business sale contract may contain warranties from the seller about particular aspects of the business.

These might concern matters such as:

• ownership of the assets;
• accuracy of information provided;
• undisclosed liabilities;
• litigation;
• employee matters;
• contracts;
• licences;
• intellectual property; or
• compliance issues.

The precise warranties appropriate to a transaction will depend upon the business and the purchase structure.

The buyer should understand both what the seller is warranting and what is expressly excluded.

12. Is the seller restrained from competing?

Goodwill can form a significant part of the value of an established business.

A buyer may therefore want appropriate contractual protection against the seller immediately establishing a competing business and soliciting the customers or employees of the business that has just been sold.

A restraint clause may address:

• competing businesses;
• geographical areas;
• time periods;
• solicitation of customers;
• solicitation of employees; and
• use of confidential information.

Whether a restraint is enforceable will depend upon its terms and the circumstances, so restraint provisions should be carefully drafted rather than treated as boilerplate.

13. What happens between signing and settlement?

A business can continue trading for weeks or months between contract date and settlement.

The contract should therefore address how the business is to be operated during that period.

Depending upon the transaction, the buyer may want obligations requiring the seller to:

• operate the business in the ordinary course;
• preserve goodwill;
• maintain stock levels;
• retain key employees;
• maintain insurance;
• avoid entering unusual contracts; and
• notify the buyer of significant changes.

This can be particularly important where the buyer has agreed to purchase the business based upon its condition and performance at the time the contract was negotiated.

14. Are finance or other conditions required?

If the buyer requires finance to complete the purchase, the contract should be considered carefully before signing.

A buyer should not assume that obtaining finance after signing will automatically allow them to withdraw if funding cannot be secured.

Depending upon the transaction, conditions may also be required concerning:

• due diligence;
• finance;
• landlord consent;
• lease assignment;
• licences and approvals;
• franchisor approval;
• transfer of material contracts; or
• other matters essential to the acquisition.

The conditions should be tailored to the particular transaction.

Why should the contract be reviewed before you sign?

The most useful time to obtain advice about a business sale contract is usually before you become legally committed to it.

A pre-contract review provides an opportunity to identify issues and negotiate appropriate amendments or conditions before the buyer is bound.

Once a contract has been signed, the buyer's rights will generally depend upon the agreement actually entered into.

This is particularly important where:

• substantial deposits are payable;
• finance is required;
• due diligence is incomplete;
• the premises are leased;
• regulatory approvals are required;
• employees will transfer;
• the purchase involves substantial goodwill; or
• the business is being acquired through a company or other structure.

Buying a business on the Gold Coast

Buying a business involves much more than agreeing on a purchase price. The structure of the transaction,

contract terms, due diligence, lease arrangements, employees, licences, taxation and settlement requirements should all be considered before completion—and preferably before the contract is signed.

For an overview of the broader transaction process, read Buying or Selling a Business in Queensland: Key Legal Considerations.

This article provides general information only and is not legal, taxation, accounting or financial advice. The appropriate investigations and contractual protections will depend upon the particular business and transaction.