Key Points to Consider When Purchasing a Business

Key Points to Consider When Purchasing a Business

Purchasing a business can be both exciting and daunting at the same time. However, there areseveral key points which ought to be carefully worked through.

Due diligence & valuation method

Due diligence is a crucial step in purchasing a business and can help you understand profitability. It is also important in confirming compliance with relevant laws so that you can reduce your future liability. Ensure that the method used in valuing the business is appropriate and relevant to the industry. Discuss this with your accountant or business advisor if needs be.

The structure of the transaction

It is important to understand whether the purchase of the business will comprise specific assets and liabilities, or whether it is a purchase of the entity that owns the business (eg acompany). There are consequences, such as tax and duty, which may flow depending upon the proposed transaction structure.

Is the business being sold as a going concern

You should also understand whether the business is being sold as a ‘going concern’ for GST purposes. The business is sold as a ‘going concern’ if the sale includes all of the assets and other elements required for the continued operation of the business and the business is carried on until it is sold. However, if the business is not sold as a ‘going concern’, GST may applyand a tax invoice should be issued on completion so that GST can be paid and input credits claimed.

 Premises

If there are premises from which the business is conducted check whether they are owned by the seller, leased or provided under licence. If there is a lease or a licence, consent from the landlord will generally be required. This can take time and will need to be factored into yourtimeframe.

 Identify key personnel

Identify any key employees whose employment is important to the business. You may wish to negotiate a term that their ongoing employment is a condition of your purchase. However, note that when you are buying the shares in a company that owns the business, there will be no change in the employer entity of the employees. The employee entitlements up to completion will ordinarily be the seller’s responsibility.

Protections in the contract

The inclusion of certain terms in the sale contract will be crucial in protecting you from the risks that may arise during and after the purchase of the business. Some helpful inclusions may be:

  • comprehensive warranties and representations about the business;
  • restraints of trade for the seller and potentially their key personnel;
  • provisions in relation to the intellectual property;
  • an indemnity from the seller as to the warranties and debts or liabilities of the business; and
  • provisions about training from the seller prior to and / or after completion.

Finally, if you have read this far and think that you need some practical advice or assistance in relation to your situation, then now is probably the time to get in touch. Austral Legal can help and we offer an initial discounted 30-minute SmartMove appointment for $80 by phone or in person at our office. Bookings can be made online through our website or simply by phoning our office on 08 9745 9550. Once we have a handle on what is required, we may well be able to offer a fixed fee for any further legal services, giving you cost certainty from the start. Austral Legal. Practical advice.