Guide to the Sale and Purchase of a Small Business
What is a Small Business:
In Australia, businesses with less than 20 employees, or a turnover of less than AU$2 million per annum, are generally classified as small businesses. Small businesses account for almost 98% of businesses in Australia, and 35% of Australia’s gross domestic profit, employing 44% of Australia’s workforce.
Regardless of a vendor’s reason for selling a business, for a purchaser, especially an inexperienced business owner, buying an existing small business may be a more efficient way to enter into the market sector.
Pre-sale/purchase preparations:
The sale of a small business may be a sale from the vendor directly, or a sale through a real estate/commercial agent, or a business broker. In general:
- The vendor pays for the fee or commission of the agent or broker that they engage in the sale; and
- Both the vendor and the purchaser will have to engage their own solicitors to complete the sale and be responsible for their own legal costs. (The same solicitors cannot act for both vendor and purchaser as this would create a conflict of interest for the solicitor).
Information to be acquired prior to the purchase of a small business:
The purchaser has to gain knowledge of all equities, liabilities, profit and loss statements, tax returns, ownership, intellectual property rights, staff remuneration, and any other information regarding the business, from the vendor in order to make their decision on the purchase, (the due diligence process).
The vendor, on the other hand, has to make this information available for the purchaser and their solicitors to review. In some circumstances, the purchaser may request a site inspection of the business location, and any relevant documentation. The vendor would have to be prepared for the site inspection as requested by the purchaser.
The selling price of a business may be an asking price from the vendor or a price recommended to the vendor by their professional valuer, taking into account the assets and goodwill of the business. The purchaser may do their own research as to the value of the business.
Freehold or leasehold property involved:
Property, either in freehold or leasehold form, is usually involved in the sale of a small business (usually as the business location). The vendor and the purchaser must ensure that the sale of the business includes the sale of the freehold property or assignment of the lease of the property, to the purchaser. The cost for the transfer of the freehold or leasehold property may be included in the selling price of the business sale, subject to negotiations.
Contract drafting and negotiation of terms:
The contract for sale of the business and/or the contract for sale of the freehold property, are prepared by the vendor’s solicitor. These two contracts are usually interdependent. The vendor and the purchaser shall instruct their respective solicitors to review the contracts and negotiate the terms of the contracts to protect the best interests of their client.
Apart from the selling price, the vendor and the purchaser will usually negotiate on the terms regarding the date of completion, deposit payable, employment of staff and training. A purchaser may also request the vendor to include a subject to finance clause if they have to seek financial approval from their bank or financial institution to fund the purchase, or a non-compete clause if necessary.
If a leasehold property is involved, the vendor will usually have to seek landlord consent before an assignment of lease or a replacement lease can be drawn up to transfer the lease to the purchaser. In the case of a replacement lease, the purchaser may have to provide a new bank guarantee and insurance certificate to the landlord’s satisfaction.
Settlement:
If the sale of business involves a sale of a freehold property, then the sale will have to be completed or settled by electronic settlement. The settlement of the sale of the business and the property will have to occur at the same time. In the event that there is no property sale involved, then the sale of the business can be completed by paper settlement. If stamp duty is payable in the sale of business or property, the purchaser has to pay the relevant stamp duty payable, (in general, there is no stamp duty payable on the sale of a business if no land is involved).
Post settlement:
After the settlement of the sale of the business, (and sale of the property, if any), the vendor takes the proceeds of sale and the purchaser becomes the new legal owner of the business, (and the property, if any). The purchaser will have to inform relevant regulatory authorities such as the Australian Securities and Investments Commission (ASIC), the Australian Taxation Office (ATO), the local council and any other relevant licencing or regulatory authorities, of the change of the ownership of the business, and comply with ongoing business compliances.
How we can help:
The above is a general guide as to some of the standard processes in the sale or purchase of a business.
As with most transactions however, there can be individual needs or requirements of the parties to be considered and carefully documented.
The sale or purchase of a business is very often a big step for the parties involved. Small issues can become big ones without careful consideration and knowledge of the process.
We are the legal partner of many small businesses in Australia, providing them with support and guidance in their transactions. Contact us now for any enquiry or further information.
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