Buying a Business in NSW? Legal Checks to Make Before You Sign

Buying an existing business can be an exciting opportunity. You may be stepping into an established business with an existing customer base, employees, equipment, Contracts and goodwill, rather than starting from scratch.

But before you sign the Contract, it is important to look beyond the purchase price. There may be outstanding liabilities, restrictive Contracts, Lease issues or other legal matters that are not immediately obvious.

This is where due diligence comes in.

What exactly are you buying?

One of the first things to establish is whether you are purchasing the assets of the business or the shares in the company that operates the business.

In an asset sale, the Purchaser generally acquires the assets identified in the Contract. In a share sale, the company itself continues to own its assets and remains responsible for its existing liabilities and obligations.

The Contract should clearly identify what is included, which may include:

Equipment;
Stock and inventory;
Vehicles;
Business name and branding;
Intellectual property;
Website and domain names;
Customer databases; and
Goodwill.

It is important not to assume that everything associated with the business is automatically included simply because it is being advertised for sale.

Review the Contract carefully

The Contract for sale should be reviewed before signing, rather than after the deposit has been paid.

You should understand:

The purchase price and deposit;
What assets and liabilities are included or excluded;
The settlement date;
Any conditions that must be satisfied;
The warranties and representations given by the seller;
Any restraint of trade provisions; and
What happens to employees and existing Contracts.

The Competition and Consumer Act 2010 (Cth) contains prohibitions against misleading or deceptive conduct and certain false or misleading representations in trade or commerce. Important representations about the business should therefore be properly documented rather than relied upon verbally.

Check existing contracts and the lease

A business may rely heavily on Contracts with suppliers, customers, contractors, software providers or other third parties. These should be reviewed to determine whether they can be transferred and whether consent is required.

If the business operates from commercial premises, the Lease is equally important. You should consider:

How long remains on the Lease;
Whether there are options to renew;
The rent and outgoings;
Whether the Lease can be assigned;
Whether landlord consent is required; and
Whether there are any existing breaches.

If the Retail Leases Act 1994 (NSW) applies, additional considerations may arise depending on the premises and nature of the business. Buying the business does not automatically mean you can continue occupying the premises on exactly the same terms.

Check for security interests and liabilities

A business may have finance arrangements or security interests registered over its assets.

The Personal Property Securities Act 2009 (Cth) establishes the personal property securities regime and provides for security interests over personal property, including certain business assets, inventory, vehicles and intellectual property. A PPSR search can help identify registered security interests affecting assets you are proposing to purchase.

The Contract should also deal appropriately with the release of relevant security interests before or at settlement.

Don't overlook employees

If you are taking over an existing workforce, employment arrangements should be reviewed before the transaction proceeds. This may include:

Employment Contracts;
Modern awards or enterprise agreements;
Annual and long service leave;
Other employee entitlements; and
Existing employment disputes or claims.

The Fair Work Act 2009 (Cth) contains provisions dealing with transfers of business. In certain circumstances, employment instruments can transfer to the new employer, so it is important to understand how the proposed transaction may affect existing employees and their entitlements.

Check the intellectual property and licences

A business's value may extend well beyond its physical assets. Its name, reputation, website, branding, trademarks and other intellectual property may form a significant part of what you are paying for.

You should establish exactly what intellectual property is being transferred and whether the seller has the right to transfer it. Depending on the business, you should also confirm that any required licences, registrations or approvals are current and can be transferred to you, or determine whether new applications will be required.

Consider the restraint of trade

If you are paying for the goodwill and customer base of a business, it is worth considering whether the seller will be able to immediately establish a competing business.

A restraint of trade clause may restrict the seller from competing for a particular period, within a particular geographical area or in a particular industry. The wording and enforceability of these clauses can vary, so they should be carefully reviewed as part of the transaction.

Do your due diligence before signing

Due diligence is only one part of investigating a business. Financial and commercial due diligence should also be undertaken to establish whether the business is performing as represented and whether the purchase price is appropriate.

From a legal perspective, the aim is to understand what you are actually buying, what obligations may come with it and whether there are any issues that could affect the business after settlement.

Some of the biggest problems in a business purchase may be hidden in a Lease, Employment Agreement, supplier Contract, security interest or clause in the sale agreement. Taking the time to investigate these matters before signing gives you an opportunity to identify issues and, where appropriate, negotiate changes to the transaction.