Of all the investments one could make, purchasing a business has to have the most potential for risk. Strangely enough, it is probably one of the least scrutinised transactions we come across.

It is always advisable to retain a business lawyer early to act for you in a purchase of business but, before you get to the stage of hiring a lawyer, there are plenty of things to be done.

Above all. Do not rush. There is usually no need to commit to any kind of contractual obligation without taking some time. Purchasers who commit too quickly often regret being hasty.

Here are a list of questions to ask yourself when considering purchasing a business:

• What am I buying?
• What do I actually know about the business, as opposed to what I have been told?
• Do I have the right entity set up to purchase the business?
• Are there employees and will they need to be transferred across?
• Is there is a lease and what obligations does the lease entail?
• Do I need a restraint of trade provision?
• Am I being asked to provide personal guarantees?
• Do I have a term sheet which sets out the key terms of the business purchase?

What am I buying?

A "company" and a "business" are not the same thing.

Businesses can effectively be bought and sold in two different ways: by sale of the "business goodwill and assets" or by sale of a controlling stake in shares in a company (which holds a business).

It is important to know what the transaction entails because there are significant implications for a purchaser depending on the type of transaction.

For a purchaser, unless there is a specific reason not to, purchasing a business and not shares is the best way to proceed.

The second consideration is to determine if you are buying a franchise or license. For instance, are you buying an existing McDonalds franchise or a licence to use intellectual property of a third party? If so, the consent of the licensor or franchisor will also be required.

What do I know about the business? Due diligence

A seller of a business is not required to disclose much of anything, by law. It is up to the purchaser to ask the right questions in order to assist them to make the best decision.

Due diligence is the process a purchaser undertakes to get to know the business. Usually, the parties will execute a confidentiality agreement and then the seller will provide information about the business to the purchaser.

A purchaser can never do enough due diligence.

Here are some things a purchaser must see before committing to purchase a business:

• Financial statements, prepared by an accountant, for the last 3 years.
• Schedule of employees including length of service and current leave balances and copies of all contracts of employment.
• Lease for the premises where the business is located.
• Continuing contracts (photocopier leases etc.).
• Schedule of all assets, including equipment which is subject to finance.
• Schedule of all intellectual property and trademarks, including certificates of registration (if any).

In addition to the above, a lawyer can conduct numerous searches in order to ensure that the business is not encumbered in any way. For instance, a search of the Personal Property Securities Register (PPSR) could reveal a charge over the business. A missed PPSR charge could result in a buyer being pursued later on by a creditor of the seller, despite the fact the business has been sold.

Never rely on verbal representations about a business unless the seller is willing to commit the warranty to writing in the contract.

Purchasing entity

Every case is different, but purchasing a business using a new company is always a safe bet. You should also consider whether or not the shares in this company will be held personally, or through a family trust.

Intellectual property, trademarks and business names

The intellectual property of a business is one of its key resources in producing profit. Registered trademarks must be identified, business names must be registered and other confidential information (like trade secrets) must be clearly identified and included in the terms of the sale.

Employees

If employees are being transferred, it is important to ensure that the purchaser is fully aware of the different options available to them. In order to assess the options, the purchaser should be across the status of each employee and be able to negotiate adjustments to the purchase price if taking over leave entitlements.

Recognition of prior service is a key decision for a purchaser. Such a decision has implications for unfair dismissal, redundancy and other employment entitlements.

Leasing

If the premises where the business operates from are leased, a purchase of business cannot proceed unless the landlord consents to the transfer of the lease to the incoming purchaser of the business.

In most cases, the 'bond' or bank guarantee provided by the seller will need to be replaced. This will be an additional cost outlay for the purchaser, in addition to the purchase price. Some landlords require up to 6 months rent to be held by way of bank guarantee.

Restraint of trade

Much of the goodwill being purchased may be tied up in the individual who is running the business at the time it is sold. It is inevitable that a purchaser will lose some of this goodwill following the sale.

The task of the purchaser, once they have purchased the business, is to rebuild goodwill. Contractual restraint of trade provisions assist a purchaser by restricting the activities of the seller (or 'key persons'), to stop them benefiting from the goodwill which they have sold. This restraint of trade will give the purchaser a head start in the event that the seller wants to start a new business.

Personal guarantees

The giving of personal guarantees should be avoided if at all possible. If a seller insists on a personal guarantee you should be very clear why they want it and what the worst case scenario would be if the guarantee was ever called upon.

Term sheet

Term sheets can be very useful in assisting the parties to clearly set out the terms of the sale. The document is not enforceable in most scenarios, but it can assist the parties to iron out any key areas of difference before the contract for sale is drafted.

Conclusion

This is not a comprehensive checklist, merely an outline of some of the things anyone buying a business should consider. Dealing with these issues early will reduce the total legal cost payable. It goes without saying that, once you have done these things, you should retain an experienced business lawyer to review or draft a contract of sale for the business and to negotiate the final terms on your behalf.

www.fglaw.com.au