Meet Kate and Peter. They handle the sale and purchases of businesses for our clients. We asked them a few questions about the process, from the perspective of a buyer.
What questions should a purchaser ask before agreeing to a price?
Kate: It is important for a purchaser to conduct due diligence prior to purchasing a business, to make sure that you are aware of what you’re getting yourself into. Often purchasers will engage a lawyer to assist them with this process (we can help!). We think differently, but collaboratively, and have separated our “questions” below.
- What assets will you receive when purchasing the business, for example stock, goodwill, intellectual property (including business names, trademarks, website and social media assets), trade tools, book debts?
- Do I need to obtain an independent valuation of the business (recommended depending on your knowledge of the market and trade)?
- Does the seller own or lease the Premises? If there is a lease, what are the keys terms of the lease, costs associated and risks (for example rent, outgoings, length of term, maintenance and repair obligations)?
- Are there any licences required to carry on the business? An example could be a liquor licence.
- What are the taxation implications attached to the business, including GST and stamp duty?
- Is the purchaser or seller subject to any foreign investment legislation, such as foreign resident capital gains withholding tax?
- Are there any registered security interests against the business, company or individual?
- Are there employees? If so, do you want to maintain their employment and what are the costs associated with this?
Can a purchaser ask the seller to help them in the business after completion?
Peter: It depends on your preference. It is common for a purchaser to request that the seller provide a handover period, both before and after completion. This can ensure a smooth transition for the continual operation of a business. However, it may not always be preferential, depending on the parties involved. It is important to remember that unless specifically engaged as an employee, a seller is usually only there to assist with a handover, not to work for free!
Kate: Ultimately, whether the seller continues on with the business will depend on what you negotiate with the seller.
Can a purchaser stop the seller from operating a similar business after completion?
Peter: Yes, and this is standard in a sale of business agreement. Generally, restraints will be cascading, in an attempt to ensure that the restraint is for a reasonable period of time and covers a reasonable geographical area. In the past the courts have ruled that an extensive time period or area can be considered unfair and not enforceable.
Is GST payable on the purchase price?
Kate: This will depend upon the situation of the sale. A sale of business will be GST free if it is considered a sale of going concern, meaning that everything is being provided to continue the business once you have purchased the business. There are a few other things that need to be considered to determine whether GST applies to a purchase, such as the registered GST status of the seller and purchaser and other potential GST implications. If you are unsure, it is best to get your lawyers and financial advisers involved.
Do purchasers automatically get the trading name?
Peter: No. Trading names is an asset that you will need to identify during the due diligence stage and negotiate purchase of with the seller. Some sellers may wish to continue operating under a particular trading name, but sell the
“bones” of the business. You may also wish to re-name the business once you are the owner. It is important to consider the reputation of the trading name, especially when determining the value of any goodwill attached to the business.
A few extra quick tips…
Kate: We recommend you consider how you want to structure your business before purchasing an already existing one.
Kate: Make sure everything you have negotiated with the seller is reflected in the sale of business agreement, before you sign!
Peter: Do your homework (i.e. due diligence)! Know what you are buying.