You have finished negotiating the key terms of the purchase of your new business. So when do you pay for the business? Normally, you make two payments. You first pay a deposit when you exchange of the sale of business contracts with the vendor. You then make the second payment on settlement to complete your purchase of the business. This article explains these two payment stages.
First Deposit on Exchange of Contract
After you have agreed to the key terms of the purchase with the vendor, the vendor will provide you with a sale of business agreement. This agreement may be in the form of a standard contract of sale, such as the one prepared by the NSW Law Society, or a more tailored contract specific to the sale.
Once you have signed the contract, you will be required to exchange the contracts and pay a deposit for the purchase of the business. In most cases, you sign a copy of the contract and send it to the vendor’s lawyer. The vendor will then sign a copy and send it to your lawyer. This exchange usually takes place via email with the original signed documents sent to each party in the post.
The deposit you will pay to the vendor will depend on the amount that has been agreed to in the sale of business agreement. Typically, this will be 10% of the total purchase price, but you can negotiate a different deposit price with the vendor before you exchange contracts. However, a deposit larger than 10% may be unreasonable to ask for. The deposit will be transferred to the vendor’s solicitor or agent and will be held on trust until the sale has been completed.
Final Payment on Settlement
You will then be required to make the final payment on the settlement date. The settlement payment includes the total purchase price, excluding the deposit paid at exchange and any adjustments. Adjustments are the apportionments of the business’ outgoings, such as:
- electricity; and
- employee entitlements.
Adjustments account for the timing of payments or unexpected business expenses. These ensure that the business purchase price reflects the true value of the business.
The matters that may affect the calculation of adjustments include:
- if there are any rental payments or utilities that are in arrears or which will become due after the settlement date;
- whether there are any employee entitlements, such as annual leave and long service leave, of any employees continuing their employment with the purchaser after settlement;
- if there are any fees or charges paid in arrears that will be due after settlement;
- whether the vendor has paid, in advance, any licence or contract fees that the purchaser will benefit from after settlement; and
- if there are any security deposits paid by the vendor, which will mature after the settlement date and the purchaser will benefit from the interest.
After you make the final payment, the vendor’s lawyer will also transfer your deposit to the vendor’s account.
When purchasing a business, you should take care when negotiating the deposit and ensure the final business purchase price includes all appropriate adjustments. Otherwise, you could end up disadvantaged after settlement.
LegalVision’s sale of business lawyers can help you with all aspects of purchasing a business, from negotiating the terms of the purchase, to calculating the correct business purchase price. If you have any questions about the purchase process, call LegalVision’s business purchase lawyers on 1300 544 755 or fill out the form on this page.
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