FAQs

What to consider when buying a business

The business structure

The first question a prospective business buyer should ask themselves is, "What is the business structure I am purchasing?" In other words, will you be registering the company as a Pty Ltd, sole trader or partnership or even a trust? Even if you do not change the business structure, you should be aware of at least the basic structure of the business form you are purchasing and what rights and obligations flow from that structure. Information about the various forms of business available in Australia can be found here.

Going concern

​When buying a business the buyer and seller should acknowledge in writing before exchanging contracts that the business will be sold as a going concern. Buying a going concern usually has tax benefits for the purchaser and the vendor, but also requires several conditions must be met in order to qualify as a "going concern", for example, that there is no interruption in the business while there is a change in ownership.

What business buyers need to look at before exchanging contracts

Financial records

The Vendor should make the financial records of the business for the last 3 years available to the purchaser. Purchasers should then seek financial advise from their accountants on those records. We have all heard stories of how previous business owners "cooked the books".

Independent valuation

Depending on the nature of the business and the sale price, it is usually worthwhile for the purchaser to have an independent valuer value the business and deliver a valuation report.

Stamp Duty 

Business purchasers may not be aware of it, but Stamp Duty needs to be paid when purchasing land (property), purchasing certain classed of business assets and when declaring a trust over dutiable property. The purchase of the business itself (goodwill) is not liable for stamp duty, but certain assets you purchase as part of the business may be liable for stamp duty.

If the sale of the business is subject to GST, Stamp Duty is calculated on the full purchase price including GST. More information about Stamp Duty can be found here.

Stamp Duty is not payable on new leases either, however, Stamp Duty is payable for any premium paid for the lease as well as where leases are entered into following an option or where leases are transferred or assigned, and where they are surrendered.

​Stamp Duty rates can be found here.

Determine the GST position

Where the business is not sold as a going concern or certain assets are sold together with the business, GST may be payable on the purchase price. Business buyers should be clear on whether the purchase price includes or excludes GST and should not be shy to ask the seller if unsure.

Tax

It is important that prospective purchasers obtain financial and tax advice on how to best structure the purchase.

Business premises

Purchase of business premises

Where business premises are to be purchased, whether together with or separately from the business itself, the conveyancing process is much the same as for purchase and sale of residential property, however, your solicitor will advise you to conduct particular investigations pertinent to your business intentions.

Lease of business premises

If you will be leasing business premises it is obviously vital the lease is secured by the same time contracts for the purchase of the business exchange. Contracts for the purchase of the business should therefore be conditional upon the new business owner being able to take possession of the intended premises. Purchasers need to be able to check the seller's lease agreement to see whether the current lease can continue or be renewed or whether a brand new lease would need to be entered into. It is important that your solicitor gives you advice on both the business purchase contract and the lease contract.

In NSW the minimum lease term for commercial property is 5 years. Retail leases can exist for a shorter period than 5 years. In both instances, it is usually important to be able to renew the lease after the initial lease period expires. If the business is flourishing, but then the business owner is not able to renew the lease, it could have a negative effect on the business.

It is recommended that all leases, including assigned leases, are registered as unregistered leases are only effective in law for the term of the lease between the original parties, and thus not recognized by the courts when assigned, although there are some equitable exceptions.

Furthermore, where a lease is assigned it is important that Vendors and Purchasers ensure the original lease agreement is varied (by an assignment agreement/ Deed of Covenant) to the effect that the (new) lessee covenants directly with the lessor (and not the previous lessee) and the previous lessee is released from liability under the Agreement. If this is not done, then the agreement is one of sub-lease and different obligations arise under a sublease as opposed to an assignment of lease.

Note that where the business premises is mortgaged, the Lessor must obtain their mortgagee's consent to the new lease or variation of a lease, and while the mortgagee will normally grant such consent when requested, in the case of short term or unregistered leases particularly, future Lessees should not rely on consent being given. The business Vendor or their Lessor should first make inquiries with their mortgagee before committing to any formal agreement.

Finally, it is very important that all necessary approvals for the business are obtained prior to entering the lease as registration of the lease will not offer any protection to a lessee who enters the lease for a purpose that is not approved e.g. by the local Council, etc.

​Rent subject to market review

 Where rent is to be determined subject to market review (as opposed to CPI or fixed percentage increase) it is very important that the lessee records the state of the premises at the time the lessee takes possession. It is important also to be aware of who made the contributions to the premises - the lessor or the previous tenant.

Both the lessor and the lessee have certain obligations to maintain the premises which can be determined by looking at the terms of the lease. If those obligations have not been complied with, then then a business valuer should make adjustments to determine a fair price for the business itself.

Investigating title to business assets

In the Business Sale Agreement, ensure the vendor warrants that chattels (machinery, equipment, vehicles etc) are sold free of encumbrance i.e. are fully owned and paid off by the Vendor and not the subject of, for example, a hire-purchase or lease agreement. In addition, all major items or property included in the business purchase should be checked against the Personal Property Securities Register to ascertain what the vendor has said about those items is actually correct.