Purchasing an existing business can be an exciting opportunity. In this article, we outline some key points to consider before signing a contract for a small business such as a cafe, gym, or takeaway shop. In Queensland, a standard form contract is often adopted for such purchases.

Is the contract subject to finance?

If you are taking out a loan to purchase the business, it is important to ensure that the contract reflects this. In the REIQ contract, this will be in Item Q. If completed, it will give you the right to terminate the contract if finance is not approved by a specified date. We usually recommend at least 21 days from when the contract is signed, to give enough time to arrange finance with your bank.

If the contract is not subject to finance, then you will have no right to exit the contract if you are unable to secure funds to settle.

Is there a due diligence clause?

By default, the REIQ contract only contains a limited right to inspect the financial books and records of the business, and to terminate if they are not substantially true and correct. We recommend that buyers request a due diligence period of at least 30 days as a special condition. This gives you the opportunity to inspect and satisfy yourself about the records and financial performance of the business, as well as any other enquiries you wish to undertake.

Is there a lease?

Where the business operates from leased premises, details of the lease should be included. The contract will need to be conditional upon either the landlord granting a new lease or consenting to an assignment of the existing lease.

In either case, the landlord will prepare documentation which we recommend you have reviewed by a legal practitioner. You will also need to obtain insurance and provide either a cash bond or bank guarantee in accordance with the landlord’s directions. Settlement cannot occur until all of the landlord’s requirements are satisfied. In our experience, this consent process can take some time.

What equipment is included in the purchase?

It is important to ensure that the contract includes all property you are expecting, so that you can properly run the business after settlement.

Ideally, equipment will be listed in schedules, divided into categories of unencumbered, leased, and rented.

  • “Unencumbered” means that the property is owned outright by the seller.
  • “Leased” equipment is subject to finance.
  • “Rented” equipment is owned by a third party.

Under the standard REIQ terms, the seller must attempt to have all agreements related to leased and rented equipment assigned to the buyer, by seeking the consent of the owner or service provider. Alternatively, the seller (with consent of the owner/service provider) can terminate the agreements and allow the buyer to enter into new agreements.

To protect themselves, financiers often register security interests over such equipment on the Personal Property Securities Register (PPSR). Where the seller is paying out leased equipment, they must arrange for the financier to release these interests on the PPSR so that you obtain good title to the property. You should ask the seller to provide you with evidence that these interests have been released at settlement.

What Intellectual Property is included?

Intellectual property is very important to consider, as it includes the ‘brand’ of the business.

Item J of the standard REIQ contract has space to include registered business names, trademarks, telephone numbers, email addresses and websites. You may search ASIC Connect to determine if the

business name is registered, and IP Australia to see if there are any trade marks. These searches are free and quick.

If the business operates any social media accounts, such as Facebook, TikTok, or Instagram, we recommend asking for a special condition providing for the passwords to these accounts to be handed over at settlement.

Is there a personal guarantee?

If you are using a company to purchase the business, many sellers will ask for your company’s directors and shareholders to provide personal guarantees. This means that if your company is unable to settle the purchase then the seller can sue you personally for damages or compel you to settle using your personal funds. We recommend attempting to negotiate out of providing such a personal guarantee where possible.

How much transfer duty will I have to pay?

In Queensland, transfer duty (formerly known as stamp duty) applies to many transactions, including a typical purchase of a Queensland business. For a sale between unrelated parties, duty will generally be calculated on the final purchase price of the business. This includes the final value of stock, which is usually confirmed at stocktake just prior to settlement.

Transfer duty is payable within 30 days of the contract becoming unconditional. Any payments after this time incur Unpaid Duty Interest (UTI), which is currently 9% for the 2022-2023 financial year. UTI accrues daily. Accordingly, it is important to ensure that duty is paid as soon as possible.

What next?

There are many considerations when purchasing a business. If you’re considering buying or selling a business of any size, Rouse Lawyers are here to assist. Our experienced commercial team can help with all aspects of purchasing a business, from preparing or reviewing a contract to settlement. If you have any questions, contact Rouse Lawyers today. 

Disclaimer

The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.

Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.

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