The Process of Purchasing a Small Business – How to Buy a Business

If you are considering purchasing a business, you should be aware of the legal process involved after you “shake hands”. Although you may think that the hard part is over and the deal is done, the process may take a few weeks to several months to finalise.

Its best to get in contact with a lawyer once you have located a business to purchase, along with other professionals such as financial advisors, valuers and accountants, as to whether the purchase is a good investment. As finance is often one of the biggest impediments to a purchase of business its also best to commence any business loan application as soon as possible.

It is usual for the seller/vendor to instruct their solicitor to draft the contract for sale which is forwarded to the buyer’s lawyer. Along with advice on the contract for sale the our business lawyers can advise purchasers on the following matters:

• The type of entity to operate your business. Eg. A sole trader, a company, a trust structure.

• The key elements being purchased, and whether it is necessary to purchase the business. For example, it may be beneficial for taxation or other financial reasons to only purchase the equipment used in the business, or have a licence granted to operate the business, or purchasing the company that operates the business instead of purchasing the business as a whole. All of these options will result in you operating a business, but the legal implications on each of the above are very different.

• Licensing requirements or qualification requirements that may or may not be specific to your industry.

Contract Advice and Negotiation

Once received our business lawyers will look closely at the contract for sale of business drafted by the seller’s lawyer. We will advise you on the terms, whether those terms are common or unusual, and if necessary, negotiate with the seller’s solicitors to amend the contract to better suit you. This process involves the consideration of many different aspects of the business which may have never arisen at the “hand shake” stage, for example:

• Making sure that the appropriate and complete equipment is included in the sale is listed as an inclusion, and most importantly, making sure that the description matches the equipment on site;

• Determining the ownership of the equipment (whether the equipment is owned outright, or subject to hire purchase arrangements, finance charge or mortgage) to ensure clear title on settlement;

• Whether the purchaser is taking on the existing employees as well;

• Any training period to be provided by the former owners;

• What will happen to the debt/creditors up to the point of sale, along with the unbilled fees or work in progress;

• Whether there a lease to be assigned; and

• Whether there registered intellectual property involved that also needs to be transferred.

Exchange and beyond

Once the parties have agreed on the terms in the contract, the contract is signed and exchanged between respective lawyers, making the agreement legally binding. The agreement will specify the role of the parties between exchange and settlement (when the balance of the purchase price is paid) and in this post exchange – pre settlement period it is necessary to attend to all or some of the following:

• Finalise loan documentation (if the contract is not subject to finance loan documentation must be finalised prior to the exchange of contracts);

• Obtaining Bank guarantees to comply with the terms of the lease (if any);

• Obtaining Public Liability Insurance, Worker’s Compensation and any other necessary insurance (such as plate glass);

• Obtaining licenses or approvals;

• Contracts of Employment;

• Notifying suppliers/clients of change of ownership, change of ABN and bank details.

The business lawyers at Prime Lawyers are experienced in acting for those who are purchasing or selling a business. If you are considering purchasing or selling a business, or you have already struck a deal to purchase or sell a business, feel free to get in touch with your nearest office. 

We have business lawyers located at Sydney, Chatswood, Sutherland and Wollongong.