Get proper legal advice before purchasing a business

Get proper legal advice before purchasing a business

Purchasing a business can be a complex task and there are a number of issues that should be considered in the process. If you are a potential purchaser of a business, you should undertake the necessary due diligence. If not, you may find yourself in an unpleasant situation.

The following is a brief summary of some important things to look out for when thinking about acquiring a business.

Due Diligence – undertake a thorough analysis of the business itself. Make sure you understand everything there is to know about the business and make sure it is right for you. This may include:

  • Are certain licenses or permits required? Is it a franchise?
  • Is stock or equipment included in the purchase price?
  • Does an inspection need to be done? For example, a health inspection for the purchase of café/restaurant businesses.
  • Will the purchase of the business be contingent on a sale of the freehold premises in which the business operates, or alternatively a transfer of lease?
  • Will there need to be a transfer of the intellectual property held by the business, such as business names or trademarks?
  • Is there goodwill attached to the business? Have you considered an appropriate valuation for the goodwill as against the other assets being sold?
  • Are there employee and supplier contracts?  If so, how are the employee liabilities and supplier contracts being transferred over?

Some more handy tips are below:

Financial records – It is recommended that you request access to the financial records for at least the last 3 years of operation of the business. For more involved acquisitions, you should appoint financial advisors to ‘stress test’ the supplied financial figures and also perform forecasts on the basis of the latest audited accounts (where possible).

Lease – if the premises are subject to a lease, it is vital that you obtain a copy of the lease so you are aware of your obligations under the same. The Retail Leases Act 2003 provides that the landlord is entitled to inspect a prospective tenant’s finances to ensure they can comply with the lease. Normally, the consent of the landlord is required as a condition precedent to the completion of the sale of the business.

How you will purchase it? – Are you buying as a sole trader, corporation, a trust or in some other capacity?  Understand the different implications of the structure of your purchasing vehicle from both a tax and legal perspective and choose the one that best suits you.

Trial period – For some purchasers, a trial period may be a good idea.  This allows for the purchaser to experience the operation of the business first hand before settlement.

GST and stamp duty – is the business being sold as a “going concern”? If so the sale may be GST-free.  Please make sure you have obtained appropriate tax advice.

There are clearly a number of matters to consider when acquiring a business.  First and foremost, it is essential to ensure you are properly advised from both a legal and tax/accounting perspective.

This article was written by Commercial Senior Associate, Josh Kaplan and Clerk, Olly Gagiero.

DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from marshalls+dent+wilmoth and other relevant experts.