How do I purchase a business?
Purchasing a business is never not a big deal. There are a lot of considerations: accounting, legal, personal, financial, risk profiling and more. In terms of the legals, there are some key steps as follows:
- Conducting due diligence
- Offer and acceptance
- Reviewing the sales of business contracts and making relevant amendments
- Reviewing lease documentation (if relevant)
- Contract exchange and settlement
1. Conducting due diligence
Due diligence refers to an investigation performed by a prospective buyer to establish and confirm details which include the assets and liabilities of a business. This must be conducted to evaluate a business’s commercial potential. Documents should be collected from the seller in order for a business lawyer to review and assist in evaluating the risks associated with purchasing a business. Such documents that should be obtained include:
- Business registration certificates
- Leasing agreements
- Supplier and distribution agreements
2. Offer and Acceptance
An offer is then made to the vendor (seller) if the prospective buyer is satisfied with the business’s future potential. The offer should be made in the form of a written letter as opposed to a verbal offer. This is because the terms of the offer are more clear cut when written. Once the offer is made by the buyer and is accepted by the seller, the parties should enter into a contract. This contract is known as a contract of sales for business. Some important terms which should be included in the contract and carefully negotiated range from:
- Tax liabilities
- What is included in the sales (eg. whether there will be a transfer of employees and what assets are included in the sale)
- The need for parties to maintain confidentiality
3. Review and amendment of the sales of business contract
Upon the construction of a contract by the vendor’s lawyer, it is important that the buyer also engages with a lawyer to overlook the draft contract. A review of the sales of business contract ensures that the terms agreed on in the formal offer and acceptance stage are emulated in the contract. As a result, the buyer’s lawyer must give advice on the contract for sales of business and renegotiate anything that may seem skewed in the vendor’s favour. During this renegotiation stage, the contract will be sent back to the vendor’s lawyer and renegotiation will continue to occur until both parties have come to an agreement.
4. Lease Review
If your business purchase involves taking over an existing physical location, then you will need to review the Lease (unless you are actually purchasing the property alongside the business). A lease can either be transferred by the vendor or the buyer can enter into a new lease. The sale of contract should establish whether the purchaser is to enter into a new lease with the lessor or if the lease is to be assigned to the purchaser.
Assignment of lease to the purchaser
This is where the rights of the seller under the leaser are transferred to the purchaser and is achieved through a Deed of assignment (deed of consent to an assignment of lease)
Entering into a new lease
This is where the seller surrenders the lease via a deed of surrender of lease and requires the buyer to enter into a new lease agreement. The date of surrender of the lease generally aligns with the commencement date of the buyer’s new lease.
5. Exchange and settlement
Exchange is the closure stage of purchasing a business occurs as the contract is signed by both parties, once negotiations over the contract has finalised. Often the buyer may be required to pay a deposit at this stage.
Settlement is when ownership is finally passed from the seller to the buyer; and the buyer takes legal possession of the business as the obligations of both parties have been decided upon.
It helps prospective purchasers or vendors to understand the complete process of purchasing a business, so that the purchase process is seamless.
If you have any enquiries or need assistance with either purchasing or selling a business, get in touch with our commercial lawyers by completing the form on this page, or calling us on 1300 337 997.