I’m looking to buy a small business, what should I do first?
It might come as a surprise, but the first thing you should do is seek legal and financial advice. The reason for this is that the operation of a business can be conducted in one of many different legal entities. The ‘structure’ of your business operation can have asset protection, liability protection and taxation implications.
Before entering into a contract to purchase a business you should be aware of the structure and the legal entity which will hold the business. This could be as simple as a Sole Trader or a complex as Company and Trust arrangement with holding and trading entities. Once you have this figure out you are in a position to start negotiating the contract to purchase.
How do I know if the business is as good as the Seller says?
When purchasing any business, a due diligence period should be included in the contract. This is usually accompanied by a confidentiality clause to comfort the Seller in knowing that the Buyer may not disclose any information provided or obtained to a third party. A due diligence period allows you to make enquiries into matters such as the financial position, lease arrangements and in some instances can allow you to make third party enquiries into the running of the business.
Due diligence clauses in contracts can be as wide or as limited as the parties agree. One size does not fit all and may not necessarily give you’re a termination right if you find something that you don’t like. A properly drafted due diligence clause is one key part of a contract to ensure you are not buying a lemon.
In the purchase of certain types of businesses, we also see retention on purchase monies clauses. This allows the Buyer to retain a certain portion of the purchase price of the business pending the continuing profitability or customer base of the business. The most common type of business we see this is in the sale of a property rental roll where some landlords may not wish for the new business owner to manage their rental property.
What if the Seller recommences trading close by after I buy the business?
Nearly all properly drafted business sale contracts will include a restraint of trade clause. As the description says, the purpose is to restrain the Seller from conducting the same or similar business with a certain area and usually for a certain period of time. For example, the Seller may not be permitted to trade in the same of similar business within fifty (50) kilometres for a period of five (5) years.
In some circumstances, the Buyer may only be purchasing one part of the Seller’s business. Therefore, a blanket restraint of trade will not work. In this event, if the parties agree, a restraint of trade clause can be drafted to particularise the areas where the Seller can and cannot trade.
An appropriately drafted restraint of trade clause can protect your investment in the business and provide you with certain rights in the event that the Seller breaches its obligations pursuant to the contract/clause.
Do I have to pay GST on the sale of my business?
Well that depends. To be entitled to claim a ‘Going Concern’ exemption from the payment of GST the business must meet the requirements of the Australian Tax Office. The basics of this is that you must be carrying on an enterprise up to and including the day of settlement and you must provide all things necessary for the Buyer to continue trading after settlement.
Sometimes this is not able to be achieved, particularly in the circumstance where the business you are buying may only be the right to conduct the business rather than the business itself, such as licence to manufacture a particular item. In that instance it is likely that the sale will need to include a GST portion. It is therefore imperative that the contract notes whether the sale price is inclusive or exclusive of GST.
If you are considering purchasing or selling a business, call the Gold Coast's premier Business Lawyers at Evolution Legal a call on (07) 5588 2000.