When you are buying or selling any business, it is always important to understand the type of business, as well as the assets that will form part of the sale or purchase. It is absolutely essential to identify which assets will and will not be included in the sale. For licensed businesses, the assets might include equipment and plant, licences, stock, the lease, goodwill, furniture, the intellectual property and any service or supply contracts. There are a number of essential legal issues that need to be considered whenever you are contemplating buying or selling a licensed business.

Asset value

Certain assets will inevitably depreciate in value, mostly because they are purchased at different times. For example, those assets purchased prior to the Capital Gains Tax was introduced in 1985 might hold a different value to assets purchased after the tax was introduced. Usually the seller and buyer have conflicting interests in terms of the value of depreciable assets. The buyer will generally want to value the assets higher so that depreciation is higher in the future, whereas the seller will make a record of the value to avoid paying tax on any excess over that recorded amount. Either way, it’s a good idea to consider the recorded values to the completion date, as opposed to relying on the last end of financial year values.

Due Diligence

Another consideration is whether there will be a clause in the contract that allows the buyer to conduct their own internal investigations of the business (Due Diligence), and rescind the contract within a specific timeframe if the buyer is not satisfied with the findings of their investigations. Typically, when this occurs, the seller retains an agreed amount. In one sense, rescission would be like losing a holding fee. The process is not dissimilar to exercising an option.

Freehold Ownership

Is the freehold being sold? If so, is it owned by a different entity to the business? This should be very obvious from the contract. To enhance asset protection and minimise taxation, the buyer ought to buy the business and freehold separately and under different entities.

Transferring licences

When buying or selling a licensed business, one of the main concerns is the transfer of licences. The contract should identify the time and contemplate any objections that may arise. If the licences are not transferred in accordance with the terms of the contract but both parties were cooperative throughout the process, who can rescind the contract? If the contract is rescinded on this basis, it is likely that the buyer will be refunded the deposit, but will the seller be able to retain anything for the lost opportunity? Otherwise, the completion date can be extended, and if this is not suitable the contract can be completed on time without transferring the licence. This final option, however, makes the seller’s licensee liable for the buyer’s licence breaches.

Conclusion

There are a variety of additional issues that should be considered in any business sale or purchase, including, stock valuation, warranties as to turnover and profitability, employee entitlements and GST. For assistance in preparing the necessary legal documents to ensure the sale or purchase of the licensed business is a smooth process, contact LegalVision on 1300 544 755 and speak with one of our experienced business lawyers.

Lachlan McKnight

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