Considerations and Risk Mitigation in Purchasing a Business in Australia
Purchasing a business in Australia is not only expensive, but it is also an investment that involves extensive legal processes. While it is true that buying an existing business may be favourable because of the established customer including customer acquisition and branding along with the existing operational framework, it also exposes the buyer to certain risks. Hence, proper legal and contractual measures along with careful due diligence is imperative to protect the balance. Here, we will guide you through investment in business in Australia along with complying with legal risk mitigation. Obtaining sound legal advice when pursuing a business acquisition is critical in making sure Australian laws and regulations are duly followed.
Conducting Due Diligence
What is Due Diligence?
Due diligence is the investigation of a specific business or company prior to a purchase which helps ascertain all risks and liabilities that may incur. It consists of legal frameworks, financing, and other rules and regulations of compliance among others.
2.1 Legal Due Diligence
Legal due diligence is defined as the assessment of contracts and employment, intellectual property ownership, and other regulatory compliance measures. The primary focus of evaluation should include the following:
- Business Sale Agreement: The contract is comprehensive so that it contains warranties, indemnities, and non-competition clauses for avoidance of loss by the buyer’s side.
- Leases: The business milestone includes possession of the business premises and lease of the premises together with renewal terms and obligations to pay rent.
- Supplier Contracts: Review existing ongoing agreements towards avoiding possible undisclosed risks and issues.
- Employment Contracts: Strict observance of the Fair Work Act 2009 (Cth) with respect to granting leave and redundancy payment entitlements.
- Intellectual Property (IP): Verify with IP Australia regarding registered owners of the trademarks, patents, and other forms of Intellectual property rights.
Financial Due Diligence
Financial due diligence ensures that the business is solvent and has no hidden financial risks. Some major activities involve:
- Reviewing the Business’s Financial Statements: Examining the audited profit and loss statements, balance sheets, and cash flow statements can shed light on the business’s financial health. These documents need to be checked for the last three years and beyond.
- Verifying Tax Compliance: Adhere to the A New Tax System (Goods and Services Tax) Act 1999 (Cth), make sure the business has met their GST requirements and review if there are any outstanding tax balances with the Australian Taxation Office (ATO).
- Identifying Liabilities: Search the Personal Property Securities Register (PPSR) to identify existing security interests.
Regulatory Due Diligence
Some businesses are required to adhere to certain industry regulation including:
- Corporations Act 2001 (Cth) regarding director’s obligations and shareholder’s agreements.
- Competition and Consumer Act 2010 (Cth) concerning the making of false and misleading representations about the business’s income or assets (ACCC v Dukemaster Pty Ltd [2009] FCA 682).
- Also, Environmental and licensing regulations through local council checks for permits and special rules for certain industries.
Choosing the Right Business Structure
Does one purchase the business’s assets or acquire the share capital of the corporation? Each option has its own legal implications.
Asset Purchase vs. Share Purchase
- Asset Purchase: The buyer assumes specific business liabilities, and purchases certain business assets such as goodwill, and intellectual property.
- Share Purchase: The buyer becomes the owner and is therefore in control of the whole company. The buyer also is responsible for all the company’s debts and legal issues.
Business Structure Considerations
Investors are often advised to consider structuring their investment as:
- Sole Trader: Assumes complete ownership but exposes oneself to personal risks.
- Partnership: Share expenses and profits, but each partner is responsible for business liabilities.
- Company: No liability for the company’s debts but has to follow the provisions of the Corporation Act of 2001 (Cth).
- Trust: A good tax strategy but legally restricting.
Reviewing Contracts and Agreements
Sale of Business Agreement
An agreement for the sale of business must provide essential terms and conditions such as:
- Warranties & Representations: The seller assures that his financial account is actual and genuine and that the concern does not possess any undisclosed liabilities.
- Indemnities: The seller is responsible for losses with regard to existing legal claims.
- Restraint of Trade (Non-Compete Clause): The Seller is forbidden from establishing a competing business within a particular period of time and scope of area (Forster v Suggett [1918] 35 TLR 87]).
Employee Transfer & Fair Work Considerations
As per the Fair Work Act 2009 (Cth), transferring employees must be offered equivalent terms and conditions unless agreed otherwise. If employees are terminated before the sale, redundancy obligations must be considered (WorkPac Pty Ltd v Skene [2018] FCAFC 131).
Verifying Intellectual Property (IP) Ownership
IP ownership should be verified thoroughly to avoid controversies at a later stage. In such cases, buyers should:
- Verify trademark registrations with IP Australia.
- Examine patent registrations to determine ownership.
- Verify assignments of business logos, website content, and any proprietary materials.
- Confirm registration of domain names to avert potential cybersquatting.
Understanding Liabilities and Debt Risks
Identifying Hidden Debts
The following actions are imperative:
- Conduct an ASIC search to verify the business’s financial background.
- Review the PPSR to ensure the absence of outstanding security interests.
- Consider liabilities with the ATO, including unpaid GST, income tax, and superannuation.
Director Liability Risks
If the business is a company, consider the possibility for previous directors to be under director penalty notices (DPNs) for unpaid employee entitlements (Deputy Commissioner of Taxation v Saunig [2002] FCA 203).
Financing the Purchase Safely
Buyers can finance business purchases through:
- Commercial Loans: Buying business assets with a loan secured against those assets provided the terms do not excessively impair the cash flow of the borrower.
- Vendor Finance: Portion of the purchase price is payment by the seller and requires adequate legal protection.
- Private Equity Or Investors: Taking minority shareholders into control by position of power and structured agreements that protect their rights under s 232 of the Corporations Act 2001 (Cth).
Protecting Against Fraud & Misrepresentation
As stated under Schedule 2 of the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law), buyers are safeguarded against misleading representations. When sellers provide fictitious financial statements, remedies available consist of:
- Rescinding the contract (ACCC v Black on White Pty Ltd [2001] FCA 60).
- Claiming damages for Misrepresentation.
Tax Implications & GST Considerations
GST Exemptions
According to s 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth), a business sale is exempt from GST if it is classified as a ‘going concern’.
Capital Gains Tax (CGT) Considerations
Buyers should verify their eligibility for CGT small business concessions under the Income Tax Assessment Act 1997 (Cth).
Conclusion: Safeguarding Your Investment in Australian Business Acquisition
Buying a business in Australia involves significant legal, financial, and regulatory risks. By conducting comprehensive due diligence, securing robust contractual protections, and obtaining professional legal advice, investors can safeguard their investment. It is essential to consult experienced commercial lawyers, accountants, and financial advisors before finalising a purchase to ensure compliance with Australian corporate and consumer laws. These steps ensure safeguarding your investment while laying the groundwork for a successful and lucrative business endeavour.
Contact OpenLegal today at enquiries@openlegal.com.au or 1300 937 574 for a confidential consultation to discuss your situation and explore the best path forward.
By Desiree Liu, Intern at OpenLegal
