Your Step By Step Guide to Buying a Business
Your Step By Step Guide to Buying a Business
Buying a business is an exciting prospect. It enables you to be your own boss and experience financial freedom. And, when purchasing an existing business, you'll benefit from an established business client base, experienced staff, and relationships with suppliers. Yet even with these systems in place, people often neglect the legal aspects of business ownership.
Consequences of inadequate preparation
If you jump into established business ownership too quickly, you may encounter some nasty surprises. For instance, the previous owner may alter the contract terms without notice. Or worse, after buying the business, you may discover hidden debt. This financial burden can lower or eliminate your projected profits entirely. To avoid this, here are five crucial points to consider when buying a business in Queensland.
Step 1: Setting out key terms on intellectual property
Prior to entering into any own business agreement, we recommend clearly outlining the key terms by which you and the other party will abide. Ahead of the agreement is a document that outlines key terms both the seller and prospective purchaser require in the contract of sale. For instance, heads of agreement may include the settlement date, deposit amount, when it is to be paid and the overall purchase price, and conditions, like finance and the transfer of the lease.
However, unlike a formal contract of sale, it is a non-binding document. As such, a disclaimer is included which states that the heads of agreement are not binding until each party goes through with the sale of the business broker contract. A key advantage of the heads of agreement contract is it significantly reduces your legal expenses.
It is also very helpful to negotiate the terms of this contract in advance with the business seller. By doing so, it is much easier for your lawyer to draft a final sale of a business contract.
Step 2: Undertake due diligence on established business
This is a crucial step when purchasing a Queensland-owned small business. Put simply, due diligence refers to thoroughly examining all business documents, profit margins, existing customers, existing employees, equipment, business's assets, business's customers, and the premises themselves.
When performing due diligence, you ensure all records, Australian credit licence, financial situation, registrations, tax implications, tax obligations, and permits are current and future demand, study business plans, and operations, examine the company's financial statements, lease agreements, and intellectual property. If you're a prospective buyer, we recommend studying the industry landscape, its competitors, and marketplace dynamics.
Conducting this research enables you to understand the business operations after you've signed the contract but before the final purchase. We recommend looking into the following: the lease, council and development approvals, employment and 3rd party agreements (i.e. supplier agreements), and business finances. If you discover a problem, due diligence allows you to walk away from the sale.
It's also advantageous to check for specific council requirements. Particularly, whether you're permitted to run the business outside its premises. Queensland leases require you to investigate if the premises can be used to operate your business.
Step 3: Reading your own business contract carefully
An aspiring business owner runs into trouble because they have not read the contract properly. They mistakenly believe they're signing a "standard contract"; however, these contracts don't sufficiently protect the rights of buyers or sellers. Before signing any document, ensure you consult with a solicitor. Studying the contractual terms, your solicitor ensures it covers the essential elements of purchase and/or sale. These include:
- Transferring the suitable business name, lease, along with other vital business assets, licenses, and permits
- Current stock prices, and any fittings and fixtures which are part of the sale
- Including relevant warranties and representations regarding the business' sales key performance indicators
- Appropriate security measures covering each party's performance of their contractual obligations
- Goodwill. This refers to a figure placed on any intangible business advantages the business has gained thus far. Such advantages can include reputation and connections within the business community. These qualities separate the value of the new business from an existing company. Also, if all current customers do not patronize the business brokers after the sale, clawbacks and retentions are included. And;
- A reasonable restraint of trade is placed on the vendor to minimise the threat of direct competition from neighbouring businesses.
Step 4: Transfer your lease from existing business
Many business purchases require you to take on a lease. So, it's crucial to ensure the landlord will sign a said lease over to you. One of the most common types of lease types is retail. Before the landlord can give you consent, the requirements set out in the "The Retail Shop Leases Act 1994 (Qld)" must be followed. According to the Act, the landlord, assignor (seller), and assignee (buyer) must adhere to disclosure requirements.
As such, the assignor and assignee have to provide separate disclosure statements at least seven days before attaining the landlord's consent. The landlord is expected to give the assignee a disclosure statement, along with a lease agreement, seven days before giving their consent. Along with these requirements, the assignee must also:
- Sign a joint statement with their lawyer, which acknowledges that the assignee attained legal advice regarding the lease, and;
- Sign a similar document with their accountant, acknowledging they received sound financial advice.
Step 5: Legal expenses relating to the business
In the excitement of taking over a business, many people forget about the myriad of associated costs and legal requirements. The good news is, you do not have to navigate this minefield alone. The KMB Legal team is highly experienced in all facets of buying, selling, or establishing a new business. Consulting our team early on in the process will prevent future problems which may arise while you're operating the business or attempting to sell it.
To ensure you are prepared, your solicitor can advise you on such business law issues as:
- Local and state government expenses
- Fees associated with your established brand and trademark registration
- Licensing and permit expenses, and;
- The transfer of duty fees involved in buying an existing business
Are you ready to escape the 9 to 5 grind and be your own boss? We have a team of Business & Commercial Lawyers here to help you. Our focus is to help you to make the purchase process as smooth as possible. Contact us today.
KMB Legal is a boutique law firm whose main practice areas are Family Law, Commercial Law and Personal Injury Law. Established in 2016 out of a need in the market for speciality legal services with a strong customer focus. We pride ourselves on our commitment to our clients, who don’t see us as their law firm, rather as their trusted legal advisors.
Law Practice is owned by MB28 Holdings Pty Ltd ABN 58 436 026 865 Incorporated under the Legal Profession Act 2007
Phone:
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Email:
info@kmblegal.com.au
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