Any contract lawyer will tell you that purchasing a business can be quite complicated. When purchasing a business you are not only purchasing the right to trade under the business name but you will usually also be purchasing a wide range of assets that come along with the business. For this reason, it’s a good idea to get your sale of business agreement reviewed by a contract lawyer before proceeding with the purchase.

Since engaging in this type of purchase can be tricky business, we have put together five top tips that can help you make sure that you are on the right track.

(1)  Know what you are purchasing

When you purchase a business, you will need to think about which of the businesses’ assets you will need to own in order to operate the business effectively. For example, if you are purchasing a dental practice you may require rights to access the existing patient database, contact numbers and any equipment that exists within the practice. You may also be purchasing trading stock that the business holds and relevant enquiries regarding this stock will need to be made.

In NSW, if you have been presented with a Standard Contract for the Sale of Business (2004), then any assets of the business that you will be purchasing will be clearly listed in the schedule in the first 2 pages of the contract. You should ensure that all assets that you are purchasing from the vendor are marked in these first 2 pages and if there is anything missing, you should speak with the vendor as soon as possible.

(2)  Ensure that all relevant information is disclosed 

There is a clause within the Standard Contract which allows purchasers to rescind or terminate the contract if the vendor has not disclosed important information to you that affects the sale of the business. However, you cannot rescind or terminate the contract based on information that has been fully disclosed in the contract that you may not have read closely or paid close attention to.

For this reason, we suggest that you ensure you have all relevant information from the vendor about the business before you proceed with the purchase. Of course, you may need the assistance of a contract lawyer to identify what information is relevant and what information is not.

In any case, it is useful to have a think about what factors may impact on you operating the business and whether or not you have been given enough information from the vendor in these areas. For example, if there are employees currently working at the business will you be offering them employment once you purchase the business? If so, you will need to know where their long service leave and annual holiday entitlements stand so that you can provide them with the necessary leave once you purchase the business. Do you require a licence to operate any equipment that is being transferred to you during the sale? If so, you will need to access these licences and find out whether they will affect your purchase of the business.

(3)   Make requisitions

All purchasers have the right to make requisitions to the vendor about the business before proceeding with the purchase. Since most contractual disputes regarding the sale of businesses arise from inadequate information being provided to purchasers, it is a good idea to exercise this right to make requisitions before completing the purchase.

Requisitions are questions that purchasers are entitled to ask vendors about the business and the vendor’s title to operate and sell the business. You can ask your contract lawyer for a list of requisitions that you can send to the vendor to make this process easier. Examples of requisitions include:

  • Is the vendor the sole and absolute owner of the business?
  • Does the vendor have any arrangements with third parties including distribution agreements?
  • Is there outstanding rent, outstanding notice, or any unresolved issue or dispute with the owner of the premises in relation to the premises?

(4)  Enquire into the lease

Most businesses are operated on premises that are under a lease. If you are purchasing a business with the intention to operate it on the current premises, then you should make some enquiries as to the nature of the existing lease and how you can have this lease assigned to you after the purchase of the business.

Generally, a Transfer of Lease form from the Land and Property Information (LPI) can be filled out and provided to the current landlord of the premises. It is vital that the landlord provides his or her consent to you operating the business on the leased premises. If you run the business on these premises without the consent of the landlord or after the landlord has denied consent then you may be held in breach of contract.

It is also a good idea to review the existing terms of the lease to find out what terms and conditions you will be bound by after purchasing the business. You could ask your contract lawyer to review the lease and ensure that the lease provides for you to operate the business on the premises in the way that you require.

(5)  Get legal advice

Most importantly, during the purchase of a business it could be in your best interests to get legal advice from a lawyer. As stated earlier, purchasing a business can be quite tricky and it useful to get things done correctly during the purchasing process to prevent any concerns or disputes down the track.

Contract lawyers will have in-depth theoretical knowledge on the process of purchasing a business and they will also have practical experience in conducting and settling such purchases. Such knowledge and experience will be useful to you during this process so that the purchase of the business can be carried out quickly and with minimal hassles.

 Conclusion

These five tips provide a general guideline regarding what you should look out for when reviewing your purchase of a business. There may be additional factors that you will have to consider depending on the nature of the business and the terms of the contract that you will be bound by. If you are in doubt, you should speak to a contract lawyer and get some legal advice to put you on the right track as soon as possible.

Ursula Hogben

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