I Am Buying a Business, Do I Need a Business Solicitor?

In Short

• Engaging a lawyer at the start of your business purchase helps you manage complexity, identify liabilities and negotiate protections.
• Understand whether you are doing an asset sale (picking up specific assets, fewer hidden liabilities) or a share sale (buying everything, including known and unknown risks).
• Through rigorous due-diligence and correctly drafted agreements you can avoid unpleasant surprises and protect your investment.

Tips for Businesses

Before you sign anything: ask your lawyer to prepare a tailored due-diligence checklist, verify key licences/consents and confirm how the purchase structure will affect your liability and tax exposure.

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Table of Contents

• What is Involved With Purchasing a Business?
• What Will a Business Solicitor Do for Me?
• How Can a Lawyer Assist Me With the Due Diligence Process?
• Negotiating the Purchase Agreement 
• Key Takeaways
• Frequently Asked Questions

Buying a business is not as simple as buying a new pair of shoes! The process can be complex and often involves a number of steps. An experienced lawyer can help you navigate this process by advising you in relation to your rights and obligations in connection with the transaction, conducting due diligence to uncover any key risks in relation to the purchase, negotiating additional protections in the sale documents to minimise your risk and assisting with the legal and regulatory steps required to complete the purchase.

In this article, we explain just some of the reasons you should engage a skilled lawyer to assist you with the process of purchasing a business.

What is Involved With Purchasing a Business?

Buyer Shares vs Buying Assets

Usually, buying a business involves either purchasing the seller’s assets or acquiring all of the seller’s shares.

1. Asset Sale

In an asset sale, the buyer purchases specific assets and liabilities of the business, rather than the entire company. The seller retains ownership of the legal entity that owns the business, while the buyer acquires individual assets such as:

• equipment;
• inventory;
• intellectual property;
• customer lists; and
• goodwill.

Key characteristics of asset sales include:

1. Selective Acquisition: The buyer can choose which assets to purchase and which liabilities to assume.
2. Clean Slate: The buyer generally does not inherit the business’ unknown or undisclosed liabilities.
3. Tax Implications: The buyer can often benefit from a step-up in the tax basis of the acquired assets.
4. Complexity: Asset sales can be more complex because each asset must be transferred individually.
5. Third-Party Consents: May require more third-party consents for contract assignments.

2. Share Sales

In a share sale (also known as a stock sale for companies with share capital), the buyer purchases the company’s shares. This results in the buyer acquiring the entire company, including all its assets and liabilities.

Key characteristics of share sales include:

1. Simplicity: The entire business transfers as a going concern, which can be simpler from a legal perspective.
2. Continuity: Business operations, contracts, and employee relationships typically continue uninterrupted.
3. Complete Transfer: All assets and liabilities (known and unknown) transfer to the buyer.
4. Tax Considerations: The seller may benefit from capital gains treatment on the sale proceeds.
5. Regulatory Approvals: May be required for a change of control in certain industries.

The choice between an asset sale and a share sale depends on various factors, including tax implications, liability concerns, complexity of the business structure, and the preferences of both the buyer and seller. Each type of sale has its advantages and disadvantages, and the decision often involves careful consideration of legal, financial, and strategic factors.

What Will a Business Solicitor Do for Me?

Structuring the Transaction

A lawyer can help you assess whether it is worthwhile establishing a company or other legal structure to complete the purchase, rather than purchasing the business in your own name. By purchasing a business through a company or other structure, you may be able to limit your personal liability. For example, if you buy the business and it is sued by a third party after the sale closes.

If you require funding to complete the purchase, whether through business loans, investor funding, or vendor financing, a lawyer can assist you in preparing, reviewing, and negotiating these documents, and in advising you on your rights and obligations under them. 

Due Diligence 

It is prudent to engage skilled legal, financial and business advisors to assist you in conducting due diligence investigations in relation to the business you are proposing to buy, before you actually buy it.

Broadly, “due diligence” refers to the process a prospective buyer undertakes to evaluate a business before purchase, identifying material risks related to the transaction. It is common for the purchase agreement to include provisions that state that the transaction is subject to the buyer completing satisfactory due diligence. This means the buyer can walk away from the purchase if it is not comfortable proceeding due to “skeletons” identified during due diligence.

Due diligence is so necessary in a business purchase transaction for several reasons, some of which are set out below: 

1. Verify Information

Due diligence enables the buyer to thoroughly investigate and verify all information provided by the seller regarding the business being acquired. This ensures the buyer has an accurate picture, such as:

• finances;
• operations;
• contracts;
• assets;
• liabilities; and
• other key factors before proceeding with the purchase.

2. Uncover Risks and Issues

The due diligence process can uncover potential risks, liabilities or other issues with the target company that were not previously disclosed. This could include outstanding litigation, environmental issues, intellectual property disputes, regulatory compliance problems and more. Uncovering these issues early on in the piece allows the buyer to properly assess and mitigate the risks. 

3. Value the Company

Extensive due diligence is critical for the buyer to properly understand and value the company they are purchasing. Reviewing all financial statements, forecasts, customer contracts and operational details allows the buyer to assess the true worth of the business and whether the purchase price needs to be adjusted. 

4. Negotiating the Agreement 

As we explain later in this article, by conducting fulsome due diligence investigations, your lawyer is then equipped to negotiate the purchase agreement from a fully informed position, helping to ensure you receive the best possible outcome.  

How Can a Lawyer Assist Me With the Due Diligence Process?

Some of the ways an experienced lawyer can assist you in the due diligence process include:

• reviewing the key legal documents of the target business (such as contracts with employees and third parties, among others) and identifying the key risks in those documents;
• determining any consents, licences and other authorisations which may be required by you in order to operate the target business following completion of the sale;
• conducting and searches of the relevant public databases in respect of the business, some of which include:
  • intellectual property databases; 
  • court and tribunal databases; 
  • the Personal Property Securities Register; or
  • the Australian Securities and Investments Commission database;
• preparing a comprehensive due diligence questionnaire, including a list of questions designed to evaluate aspects of the target business;
• identifying gaps in the materials and responses provided by the seller and requesting appropriate additional information; and
• preparing a comprehensive due diligence report setting out the critical risks and material issues identified during the due diligence process, including insightful recommendations on how those risks can be managed. 

Negotiating the Purchase Agreement 

After conducting thorough due diligence, your lawyer can negotiate the terms of the purchase agreement from an informed and knowledgeable position, taking into account the true state of the business you are planning to acquire. A lawyer can assess whether the rights and obligations in the purchase agreement align with market standards and whether any additional protections, rights, or obligations should be included in the agreement as a result of key risks uncovered during the due diligence process.

The seller usually makes various representations and warranties about the business in a purchase agreement. A skilled lawyer can help the buyer confirm the accuracy of those statements before completing the transaction and determine whether any additional statements should be included to mitigate the buyer’s risk, taking into account the results of the due diligence investigations. 

Buying a Business: Guide to Negotiating Terms

Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.

Download Now

Key Takeaways

Lawyers play a vital role in assisting with the discharge of security interests over key assets, ensuring a clean title transfer. They can help obtain necessary consents from third parties, which may be required due to a change in control when ownership transfers from the seller to the buyer.

In share sales, lawyers can assist with regulatory filings, such as ASIC updates. Furthermore, they can guide you through the process of submitting applications and/or notices to regulatory bodies regarding licenses required to operate the business, ensuring compliance with all legal and regulatory requirements throughout the transition. This comprehensive legal support helps minimise risks and ensures a smoother, more secure business acquisition process.

If you want to assess your options further or have any questions, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions