5 Crucial Questions to Ask When Buying a Business

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 14 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.

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 of the business 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 or Instagram, we recommend asking for a special condition providing for the passwords to these accounts to be handed over at settlement.

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 8.10% for the 2020-2021 financial year. UTI accrues daily. Accordingly, it is important to ensure that duty is paid as soon as possible.

What next?

These 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, please contact us on 07 3667 9696.