Purchase or Sale of Business
There are many issues that you need to consider whether when you are buying or selling a business. One way of analysing the situation is to pose the following questions –
What is the most important asset of the business?
- Its location? (the lease and or title to the property) need close examination, what is the zoning of the property from which the business is conducted? Is there an existing approved development application or do you need to make one?
- the client list or the existing client contracts? (are they enforceable and assignable – is there a “change in control clause”)?
- the tangible assets – plant and equipment (what chattel leases exist if any – are any of those assets subject to a charge (do they have PPSR registration)?
- what intangible assets are there? Goodwill, websites, logos, email addresses, social media accounts, copyright (these need to be addressed in detail)
- is the apportionment of price between “goodwill” and “plant and equipment” appropriate? You can only depreciate plant and equipment from the value you acquire it for. It is always in the vendors interest to have this figure low whereas the purchaser wants it to be high.
- stock and work in progress (WIP) – what is the value of these and how are they to be adjusted? Always beware of old stock;
- are there any key employees? What is their existing contractual arrangement, will they sign a new employment agreement and can they be restrained from setting up in competition? You need to examine all their employment agreements and be aware of their current entitlements – long service leave, personal leave, etc. Have employees been paid correctly in accordance with any award or contract and is all superannuation up-to-date? Are there any potential workers compensation claims?
- are you purchasing the business assets or the shares? There can be disadvantages – skeletons in the cupboard, outstanding liabilities but there can be advantages eg all the existing contracts with customers don’t have to be renewed. If you did take the company structure, you want very strong warranties if you are the purchaser and of course if you are the vendor, you do not want the warranties to be so strong – What is the difference between “absolute warranties” and “best of knowledge information and belief”. You should consider limiting warranties in time and amount;
- would you want a restraint of trade on the vendor, and if so, what will the law allow? It must be reasonable in the circumstances;
- what licences are required to operate the business, if any?
- what software is used in the business and it is owned or licensed and is it assignable?
- Can the sale transaction be regarded as “a going concern” and therefore exempt from GST? The Office of State Revenue has a very strict ruling on what is a going concern. It is not always what you might think. This is obviously important for cash flow (if purchasing shares in the company there is no GST);
- Are any moneys to be retained for a period of time as security for breach of warranty? If so, how much and what is considered reasonable?
As you can see, you need to carry out due diligence on all contracts and other records of the business. We have detailed checklists for this.
These are just some of the queries you should have when dealing with a business.