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Purchasing an existing business is not as simple as it sounds. It is important to engage a lawyer to make sure you understand exactly what you are purchasing and highlight any risks hidden in the business sale and purchase agreement to you. For example, you may be agreeing to take over the liabilities and debts of the business as well as its assets. Accordingly, it is important to know and understand what those liabilities and debts are.

This blog will provide an overview of some of the important matters required to be considered before signing a business sale and purchase agreement – due diligence is an important step that you should not skip!

The process of investigating potential hidden problems and checking the credibility and financial status of the business is called “due diligence”. Whilst carrying out due diligence, you should obtain and check the financials of the business. We recommend doing this by examining the businesses financial statements for the past 3 years to ensure that the business is, and has been, profitable and that there are no significant debts or liabilities which could be passed on to you. If there are debts, you can always negotiate with the vendor that these be paid out prior to settlement of the purchase of the business and / or if they are continuing or accruing debt, that it be adjusted so the vendor is liable for it up until the date of settlement and then you take it over thereafter.

You should also check the condition of the stock and plant and equipment that are included in the purchase price and have an independent valuer inspect and value the plant and equipment to make sure that it accurately reflects the asking price of the vendor.

Another important step in carrying out due diligence is to undertake credit checks with credit reporting agencies, conducting a search of the entity either under the Australian Securities  & Investment Commission (ASIC) for a company or the Australian Financial Security Authority (AFSA) for an individual to ensure that there is no impending winding up or bankruptcy proceedings issued against the vendor entity. You may also wish to conduct a search with the South Australian Courts to ensure that there are no other current Court proceedings issuing against the vendor entity. These searches are important because you want to be confident that you are purchasing a business with a good reputation and that you will not have any issues engaging suppliers or other providers due to the previous business owner giving the business a bad reputation due to poor credit or litigious history.

The lease, if applicable, is another important matter that you should consider. If the premises of the business are currently under a lease, whether you take over the existing lease or sign a new lease, will depend on the terms of the lease which the landlord has with the vendor and your negotiations with the vendor and the landlord. Whatever the case may be, because the landlord is not a party to the business sale and purchase agreement, the landlord’s consent to either having the lease assigned to you or entering into a new lease with the landlord will be required. If you do not do this, you may end up with no place to run the business from.

Other matters which are important to consider are:

  • employee entitlements;
  • what goodwill is being purchased;
  • vendor assistance/ training;
  • whether any contracts or agreements are required to be transferred or exist;
  • whether the vendor (or your new landlord) is asking you to provide a guarantee or other security; and
  • what if any restraint of trades are needed.

All of these matters should be carefully dealt with in the business sale and purchase agreement to ensure that all terms agreed to are recorded properly.

It is important to involve a lawyer at an early stage to assist you conduct a comprehensive due diligence and to draft or review the business sale and purchase agreement. Doing so will ensure you are getting what you pay for, limit what liabilities you take on and avoid unnecessary legal action in the future which can be costly.

If you are thinking about purchasing a business, please contact us at Clarke Hemmerling Lawyers on (08) 8333 2130 and we can assist you ensure that you are protected during the business purchase process.

This Blog was written by Renee Hii, Solicitor at Clarke Hemmerling Lawyers.

This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you.  Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.