Buying a business involves a number of important legal, financial and commercial considerations. If you are looking to buy a business, this article sets out three key steps in the sale process.

1. Gathering Information on the Business

Due diligence is the process of gathering facts on a business and examining them before a legal contract is signed by both parties. This process will help you gain a better insight into the business and their assets. Due diligence may include information about:

  • the past and current financial position of the business,
  • revenue projections and targets for the future;
  • tax obligations;
  • business debts;
  • any expenses that will be passed onto you, the new owner;
  • the ownership structure of the business (e.g. sole trader or company);
  • litigation the business has been or may be involved in;
  • any issues with employees;
  • any secured interests over the assets of the business (for example, a mortgage over a property);
  • physical assets that the business owns;
  • intellectual property that the business owns; and
  • lease arrangements for any premises used by the business.

As a buyer, you will usually undertake due diligence after you and the seller have agreed in principle to a deal. The seller may also want you to sign a confidentiality agreement before you access any highly sensitive information (see below). Due diligence is a crucial step in the process of purchasing a business, particularly if you are paying a significant price. It minimises your risk and also prepares you for running the business. The process is expensive and time-consuming - you should be confident that you will be going through with the final purchase.

2. Legal Documents

You will need a business lawyer to draft the following documents to complete the sale.

Confidentiality Agreement. When you are discussing the sale and finalising the key terms of the transaction, the seller will likely ask you to sign a confidentiality agreement(also known as a non-disclosure agreement). The confidentiality agreement legally protects the sensitive business information that you will receive to conduct due diligence. The seller will want to ensure that you don't use their business information for your own purposes if the sale falls through.

Heads of Agreement. A Heads of Agreement sets out the key terms of the deal. A Heads of Agreement is usually non-binding, except for some key terms. For example, as the buyer, you should negotiate a period of exclusivity to buy the business. Once you sign the Heads of Agreement, the vendor agrees that it will not offer the business for sale to someone else for the duration of the exclusivity period (e.g. 30 days after parties sign the Heads of Agreement). Sale of Business Agreement The most important document is the Sale of Business Agreement. The Sale of Business Agreement sets out the main terms that were contained in the Heads of Agreement as well other commercial, legal and contractual issues. Some key terms cover:

  • employee transfers and entitlements;
  • financing approvals (if you require finance);
  • promises about the business (which are usually referred to as warranties);
  • indemnities for loss or liability;
  • requirements for third party consents (for example, landlord or franchisor consent); and
  • the right to terminate for breach or cancel the agreement if the seller doesn't meet key requirements.

Lease Agreement. If the business operates from a shopfront, it's essential that you review the lease agreement. Check the terms of the lease, including the renewal period. If there is only a little time remaining on the existing term, you want to insist that a new lease is granted to you. The sale of the business should be conditional on the transfer of the existing lease or grant of a new lease.

3. Get Professional Advice

It's crucial that you seek professional advice to assist with the complex process of negotiating and completing the sale of business.

A business lawyer will help you request and review all of the legal related information you receive during the due diligence process. The seller’s lawyer will usually draft the initial agreements, so your lawyer can review all the contracts and agreements needed for the sale, and negotiate favourable terms for you.

You should also consider speaking to an accountant to assist you to review the financial statements of the business and provide financial due diligence advice. They will also be able to advise on any transfer (stamp) duty costs and GST consequences arising from the purchase. You might also consider reaching out to industry experts if you wish to gain more market insight into the particular business you’re buying.

Buying a business is a time-consuming process, but if you follow the steps correctly, you’ll avoid costly mistakes arising later on.

Author: James Douglas. James is a Practice Leader in LegalVision’s Sale of Business team. In his role with LegalVision, he uses his experience working for large corporates and SMEs to deliver cost-effective, quality and commercial advice in respect of M&A corporate transactions. If you have any questions or need assistance buying or selling a business, get in touch on 1300 544 755.