Buying and selling businesses

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​Buying a business

Form of business

The first question a prospective business buyer should ask themselves is, "What is the business structure I am purchasing?". Depending on the existing form of the business, and your plans for your business, you may want to change the business form. 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.

​When restructuring a business it is important that before it is restructured, and if it is bought as a going concern, the parties acknowledge in writing before or at the time of restructure that the business will be sold as a going concern.

​The purchase agreement

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.

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.

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 is not liable for stamp duty, but the 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

Refer to information on Going Concerns under "Selling a business" on this page. 

Tax

We do not give tax advice, however, it is important that prospective purchasers obtain financial and tax advise on how to best structure the purchase. For example, buying trading stock on (genuine) consignment rather than outright may lead in some jurisdictions and in some instances to a stamp duty saving.

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


Where business premises are to be leased with the business, it is vital that the incoming business owner/lessee receives possession of the premises at the same time as the sale of the business itself takes place. Contracts for the purchase of a business must be made subject to the new lessee being able to take possession (and occupation) of the intended premises.

Furthermore, lessees should be checking at least the following matters with respect to the lease:​
  • Is it possible for the current lease to continue ("be assigned") under new business ownership or does a new lease need to be entered into?
  • That the lease terms and conditions have been discussed with your solicitor.
  • If there has been a recent change of landlord it could indicate an impending increase in lease payments or redevelopment proposals.

In NSW the minimum lease term for commercial property is 5 years. It is recommended that all 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.

Note that where the premises is mortgaged, the Lessor must obtain the 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, Vendors and Purchasers should not rely on consent being given.

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 local Council etc.

Rent subject to market review

Where rent is to be determined subject to market review it is very important that the state of the premises in which it was received is considered as well as any contributions made to the premises by the parties. A valuer, for example, may assume the premises was fitted out by the Lessor when in fact it was fitted out by the Lessee and then base the rent on the fitted-out value, which would not be correct. The Lessor and Lessee should maintain the property as stated in the lease agreement. So, when working out a rent, the valuer should also look at whether those obligations have been complied with, and if not, take that into account.

Investigating title to business assets

In the Business Sale Agreement, ensure your 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 on the PPS Register to ascertain what the Vendor has said about those items is actually correct.


​Selling a business

Selling a 'going concern'

Selling a business as a going concern is an attractive option for buyers and sellers. One of the reasons for this is that a Going Concern is exempted from paying GST on the sale of the business (and for a purchaser that means a saving both on the purchase price and on Stamp Duty as well as avoiding timing delays that result when claiming input tax credits). To receive the exemption, the business entity must be able to continue functioning as a business when the new business owner(s) take over the business. In addition, the requirements of the Australian Tax Office must be complied with. This means that not only does the business have to continue to function as a business, but it must also:
  1. Be purchased for consideration (i.e. money)
  2. The purchaser must be registered for GST (pre-registration is possible).
  3. The parties agree in writing (in the contract of sale for the business) that it is sold as a going concern and this must be done before the date of supply (i.e. the day effective control and possession of the business is handed over to the purchaser) and preferably before contracts exchange. This term may not be inserted into the contract after the date of supply has passed.
  4. The vendor supplies all things necessary for the continued operation of the business - i.e. major things without which the business could not operate such as particular equipment, a licence or a particular telephone number. It is not necessary that absolutely everything in the business be sold for the business to continue to operate as a going concern, however, it is important to note that what the ATO considers necessary for the continued operation of the business may be quite different from what the parties to the contract see as necessary to the continued operation of the business, therefore caution should be applied. It is important that prospective vendors and purchasers check the requirements for the particular business with the ATO in this regard.
  5. The vendor must continue to operate the business as a business until the day of supply. The supply date can occur before the actual settlement date.
Finally, it is important to note that only single business entities can purchase or sell going concerns. If a business is held in different parts by different entities, it can not be sold as a going concern. There are a few exceptions.

The risk that the transaction might not be viewed by the ATO as a going concern ultimately rests with the vendor. Although generally sale contracts provide the purchaser is liable for GST, as a matter of law, it is the vendor that is required to remit the GST to the ATO. For this reason the Vendor should require the purchaser to indemnity the Vendor for any GST (and penalties) that may be payable in the event that the parties are mistaken as to whether the sale of the business constitutes a GST- free going concern.

The Vendor's duty of disclosure

Vendors should be mindful that they do not mislead the purchaser by their statements, silence or conduct. Vendors should be diligent in providing correct and full information when requested, and if the Vendor is unsure of the answer to the question put by a Purchaser, the Vendor should admit to not knowing the answer and advise the Purchaser to make further investigations relating to that question. Likewise, when selling a premises together with the business, the Vendor should ensure their real estate agent does not make false or misleading representations for which the Vendor could be held vicariously liable.

Where a Vendor discloses information to a Purchaser, it cannot always be assumed that the Purchaser is bound to keep that information confidential. An obligation of confidentiality can only be said to exist if it can be proved that a Purchaser knew or ought to have known that the information disclosed was disclosed by the Vendor in confidence. Therefore in some instances it may be necessary to enter into a confidentiality agreement prior to entering into negotiations for the sale of a business.

GST and Capital Gains Tax Implications

We do not give tax advice and this should be obtained from your accountant.

Restraints of Trade

Restraints of Trade must be reasonable in public interest (i.e. must afford only adequate protection and nothing more). Protection of legitimate business interests must be finely tuned so that the business does not venture into territory of becoming a monopoly.

The length of time that the restraint should reasonably apply for as well as the area to which it may reasonably be applied depends on the nature of the business sold.