COMMERCIAL AND PROPERTY LAW
I'm buying a business, do I really need a contract?
The simple answer is yes, you do. A contract will contain within it the essential agreement between the parties and sets out what you're entitled to receive in exchange for the money you are paying.
Things that should be dealt with in the contract include:
- Any plant and equipment and/or stock included in the purchase
- The business name to be transferred to you
- The premises lease, if there is one, and how it is to be dealt with. For example, an assignment usually occurs
- Employees and payments to be made to them
- Any restraint to be imposed upon the seller restricting the seller from conducting a similar business for a period of time to let you get established. This also protects the goodwill you will be buying.
Should I undertake a due diligence exercise prior to buying a business?
Due diligence is a systematic review of all relevant information about a business. It should include an assessment of all aspects of a business including the business financial records, the premises lease and any licences or approvals to conduct the business.
Normally lawyers and accountants work together to provide a potential purchaser client with an overall review of the business to enable the client to make an informed decision.
Due diligence can be conducted pre-contract but often the purchase contact is conditional upon the purchaser being satisfied with its due diligence enquiries. It is very important that the condition is correctly worded to enable a termination if the due diligence results are not what was expected.
What sort of costs are involved in buying a business?
The following are examples of costs associated with buying a business in addition to the purchase price:
- Stamp duty;
- Legal and accounting fees;
- Stamp duty;
- Costs associated with the Lease including registration fees and transfer fees;
- Possible bank guarantee under the lease; and
- Bank fees on any loan application made.
Why is the permitted use under my lease so important?
When you lease premises, you lease it for a particular purpose and use. Often that is described as the "permitted use" in the lease document. If you are not using the premises for that "permitted use" you are effectively in breach of your lease. It is therefore essential that the permitted use is correct from the outset and that the owner's consent is obtained if there is a change.
Sometimes owners agree that a permitted use can be exclusive to one tenant. That means that no two tenants can have the same permitted use within the building or shopping centre.
An exclusive use clause is highly sought after particularly in leases within large shopping centres. It should always be requested as part of the negotiation process.
I've bought a business with a friend or family member - do we need an agreement between us?
It is always important to ensure that the relationship between the owners of a business is set out in an agreement.
The type of agreement will depend on the parties and the structure used. The agreement however should deal with the relationship between the parties including:
- What happens if one party wants to sell their share in the business;
- How will the value of that share be calculated;
- What happens if there is a dispute between the parties; and
- What each party's role is in the business and what their financial contribution is to be and what each party will get out of it.
It is so important to have an agreement in place which accurately reflects what the parties intend and to update it as required. It saves time, angst and money if there is an issue later.
This website provides information only and is not a substitute for legal advice.
