A business sale brings together a contract, a lease, tax, staff and licences, all of which must be ready on one settlement day. Asset Conveyancing acts for buyers and sellers of businesses in South Australia, Victoria, New South Wales, Queensland, Western Australia and Tasmania, with one qualified professional managing each matter.
What does a sale of business contract cover?
The contract identifies what is being sold, the price and its allocation, the deposit, conditions such as finance and lease assignment, the settlement date, warranties, the seller’s restraint and the handover period.
Some states require a prescribed seller’s statement for smaller business sales. In South Australia, for example, a Form 2 statement under the Land and Business (Sale and Conveyancing) Act 1994 is required for sales below a set price threshold, and the buyer has a cooling-off right.
How is the price of a business structured?
The price is usually split between goodwill, plant and equipment, and stock at valuation, counted at or just before settlement. The allocation affects tax and depreciation, so agree it with your accountant before signing, and state how stock is valued and any cap.
Is GST payable on the sale of a business?
Not if the sale qualifies as a GST free supply of a going concern. Under ATO rules, the buyer must be registered (or required to be) for GST, the seller must supply everything needed to keep the business operating and run it until settlement, and both parties must agree in writing that it is a going concern. If any requirement fails, GST may be payable.
Will the seller pay capital gains tax?
Possibly. Selling goodwill can produce a capital gain, and small business concessions may reduce or remove it if detailed conditions are met. Sellers should get accounting advice before agreeing the price allocation.
What due diligence should a buyer do?
Confirm the business earns what the seller says and can legally operate from the premises. Check at least:
- financial statements, tax returns and BAS, reviewed by your accountant
- the lease, its remaining term and options, rent reviews and make good obligations
- the Personal Property Securities Register (PPSR) for security interests over equipment and stock
- licences, permits and council approvals for the use
- key contracts, employee records and accrued entitlements
How is the lease transferred to the buyer?
The lease is assigned to the buyer with the landlord’s written consent, usually by deed of assignment. The landlord may require guarantees or a bank guarantee. For retail premises, state legislation sets how consent is requested, when it can be refused and whether the seller is released. Make the contract conditional on consent. See commercial and retail leasing.
What else transfers with the business?
Licences and permits. Some transfer with approval, such as many liquor licences. Others may need a fresh application by the buyer. Start early.
Intellectual property and domain names. List business names, trade marks, domain names, social media accounts, phone numbers and customer databases, and how each transfers.
Employees. The contract should state which staff the buyer will employ and whether prior service is recognised. If it is, accrued leave usually transfers to the buyer with a price adjustment; if not, the seller generally pays it out. Fair Work Act transfer of business rules can apply.
What protects the buyer after settlement?
A restraint of trade stops the seller opening a competing business nearby for a set time, and must be reasonable in area and duration to be enforceable. A training period keeps the seller in the business for an agreed time to introduce customers and suppliers. Warranties confirm matters such as the accuracy of the financial records and that there are no undisclosed disputes. Sellers should limit warranties to what they can stand behind.
What are the steps in buying or selling a business?
- Agree the key terms. Price, allocation, inclusions, settlement date and conditions.
- Prepare or review the contract. The seller’s side prepares the contract and any required disclosure statement; the buyer’s side reviews and negotiates.
- Sign and pay the deposit. Any statutory cooling-off period starts, and the conditions clock begins.
- Satisfy the conditions. Finance, accountant review, lease assignment consent and any franchisor approval.
- Arrange transfers. Licences, employees, business and domain names, utilities and supplier accounts.
- Stocktake and settlement figures. Stock is counted, and rent, outgoings and employee entitlements are adjusted.
- Settle. The balance is paid, security interests are released, keys and records are handed over and the training period starts.
A franchise adds the franchisor’s approval and the Franchising Code: see franchise agreements. If the freehold is included, see commercial property conveyancing.
Common questions about buying and selling a business
Is there a cooling-off period when buying a business?
It depends on the state and the price. Some states give a statutory cooling-off right for smaller business sales, such as South Australia, where a Form 2 statement is required. Otherwise there is often no cooling-off right unless the contract provides one.
How long should a restraint of trade last?
There is no fixed rule. A restraint is enforceable only if it goes no further than reasonably necessary to protect the goodwill the buyer paid for, which depends on the type of business, where its customers come from and how long goodwill takes to transfer. An unreasonably wide restraint may not be enforced at all.
What is a PPSR search and why does it matter?
A PPSR search checks the Personal Property Securities Register for security interests, such as finance or leasing arrangements, over the business’s equipment, vehicles or stock. If an interest is not released at settlement, the financier may still be able to claim the asset, so the contract should require releases at settlement.
Can a business sale fall over because of the lease?
Yes. If the landlord refuses consent to assign, or the remaining term is too short for the buyer’s lender, the sale may not proceed. Make the contract conditional on lease assignment, and give the landlord the buyer’s financial information early.