Buying a Business in Victoria

Most transactions start with a non-binding heads of agreement or term sheet recording the price, structure (asset or share sale), proposed completion date, any conditions (finance, landlord consent, due diligence), key warranties and the shape of any restraint of trade. The heads of agreement is largely non-binding, but the binding clauses — confidentiality, exclusivity, costs of failed deal — should be checked carefully. A well-drafted term sheet shortens the contract negotiation that follows.

Due diligence is the buyer's opportunity to verify what is being bought. The legal due diligence checklist for a small or medium business typically covers:

• corporate structure and ownership;
• material contracts and customer arrangements;
• the lease of the business premises;
• employees, contractors and incentive arrangements;
• licences and registrations needed to operate;
• intellectual property, including business names and trade marks;
• litigation and threatened claims;
• tax compliance and historical audits;
• insurance and any prior claims history.

Financial and operational due diligence is conducted in parallel by the buyer's accountant. Findings from due diligence feed back into price adjustments, additional warranties and conditions, or — in a small number of cases — an early decision to walk away.

The most important structural choice is the acquisition vehicle. Buying through a discretionary trust with a corporate trustee is the standard structure for owner-operated businesses, providing asset protection and flexibility on future distributions. Buying through a company is appropriate where there are unrelated co-investors or specific tax outcomes are sought. The choice has long-term consequences for tax, succession and asset protection, and should be made before signing rather than corrected later.

The sale contract documents the price and structure but — more importantly — allocates risk for everything that might go wrong. Key provisions to negotiate include:

• price and how it is allocated between assets (which drives the buyer's depreciation and the seller's CGT position);
• warranties about the business, the assets, the accounts and tax compliance;
• limitations on the seller's liability under those warranties (caps, time limits, materiality thresholds);
• conditions precedent (landlord consent, finance, key contract assignments);
• restraint of trade — duration, area and scope;
• treatment of employees and accrued entitlements;
• retention or earn-out arrangements where the price is partly performance-linked.

Most retail and commercial leases require the landlord's consent before assignment to a buyer. Where the lease is governed by the Retail Leases Act 2003 (Vic), the landlord cannot unreasonably withhold consent, and the outgoing tenant can obtain a release in some circumstances. Where it is a non-retail commercial lease, the landlord has considerably more leverage. The lease should be reviewed early in due diligence and the assignment process started in parallel with the contract negotiation, because landlord delay is one of the most common causes of pushed-out settlements.

At settlement the buyer pays the balance of the price (net of deposit and any agreed adjustments), takes possession of the assets, becomes the new tenant under the assigned lease, and takes over the workforce. In the days after settlement the buyer must change bank accounts, transfer utilities and insurance, notify customers and suppliers, register the business name and update ASIC and Australian Business Register records. Stock takes, customer transitions and supplier re-negotiations occupy the first month. The legal work is largely done at settlement, but the work of integrating the business has just begun.