Summary
- Settlement typically occurs between seven days and three months after signing, during which the purchaser pays the balance and completes various transfers.
- Key obligations include transferring intellectual property, assigning or obtaining a lease, releasing securities on the PPSR, and offering employment to staff.
- This article explains the business sale settlement process in Australia, providing step-by-step guidance for business owners purchasing an existing business.
- It is written by LegalVision’s sale of business lawyers. LegalVision, a commercial law firm, specialises in advising clients on business sales and acquisitions.
Tips for Businesses
Start preparing immediately after signing the sale agreement. Create a checklist of all items requiring transfer, including intellectual property, licences and utilities. Conduct equipment inspections and arrange professional assessments for essential assets. Submit requisitions promptly to identify issues early. Confirm all PPSR securities will be released before settlement and allow sufficient time for lease negotiations.
On this page
- Sale Settlement for Businesses: An Overview
- Paying the Purchase Price
- Transferring the Intellectual Property of the Business
- Transferring a Lease or the Grant of a New Lease
- Authorised Use of the Premises
- Checking the Equipment
- Transferring the Employees
- Providing Requisitions
- Releasing Securities
- Transferring the Utilities
- Picking Up the Keys
- Conducting a Stocktake
- Transferring Business Contracts
- Common Settlement Delays
- Key Statistics and Data Points
- Key Takeaways
- Frequently Asked Questions
Buying a business can be exciting, but the process can also feel overwhelming. After signing the sale agreement, there is usually a delay before settlement, when ownership officially transfers. During this time, you should carefully review the agreement to understand what will be transferred between the parties. The contract will often include a ‘completion date’ (i.e. the date parties work towards to make settlement happen). The time frame between when you and the seller sign the contract and the completion date depends on what parties need to transfer. This could vary between seven days to three months. This comprehensive guide will step you through the settlement process.
Sale Settlement for Businesses: An Overview
The business sale settlement process can be broken down into the following key steps:
- paying the purchase price to the vendor;
- transferring the business’ intellectual property;
- granting a new lease, or transferring the existing lease;
- authorising the use of the premises;
- checking the equipment to ensure that equipment is suitable;
- transferring employees to be taken on after settlement;
- providing requisitions to find out more information about the business. before settlement;
- releasing securities;
- transferring the utility accounts;
- picking up the keys;
- conducting a stocktake; and
- transferring existing business contracts with third parties.
These steps outline what the vendor and purchaser must do to ensure a successful sale settlement is reached.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Paying the Purchase Price
When parties sign the sale of business agreement, the buyer pays a deposit. This is usually 10% of the purchase price but depends on what the parties agree. You will need to pay this deposit to the vendor’s agent or lawyer to hold on trust until settlement. The seller does not receive the deposit until settlement takes place. This common procedure allows for the deposit to be transferred back to the purchaser if the sale does not go through due to the vendor breaching the contract.
Parties usually include the final amount in the contract (subject to any adjustments). Adjustments are payments that either party must make before settlement can take place and can include:
- rent for the property;
- outgoings such as electricity, gas and water;
- employee entitlements; and
- stock.
Rent and outgoings are the most frequent adjustments because settlement typically happens after the vendor has paid the landlord rent and outgoings for the next month. Parties must then calculate how much the seller paid for rent and how much the buyer owes after settlement. For instance, imagine that:
- settlement will be on the 14th of February;
- rent is $4,000 a month; and
- the vendor pays rent on the 1st of each month.
In this scenario, the seller will be responsible for the first 14 days of the month and the purchaser for the next 14 days (15 February – 28 February). They are each responsible for half the rent, being $2,000. The amount is then adjusted at settlement. So, the purchaser pays the $2,000 that the vendor already paid.
The vendor then provides the purchaser with payment directions setting out how they must pay the final amount at settlement (e.g. bank cheque or electronic transfer).
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Transferring the Intellectual Property of the Business
The vendor will also likely sell their intellectual property (IP) with the business, including:
- business name;
- contact details of the business;
- email addresses;
- websites;
- domain names;
- trade marks;
- client lists; and
- social media accounts.
It is important that the purchaser confirms that the sale of business explicitly sets out the IP that the vendor will transfer as part of the sale. For instance, if the seller does not transfer the business name, they remain the owner and could use that name to set up another competing business.
The vendor must assist with the transfer process by:
- speaking to their phone providers to transfer any phone numbers;
- providing you with the login details for the email addresses and social media accounts;
- speaking to their hosting platform to transfer the website and any domain names;
- submitting transfer forms to IP Australia to transfer any trade marks; and
- providing you with the complete client lists of the business at settlement.
The vendor can transfer a business name using ASIC Connect by:
- logging in to their account (or create one);
- requesting a transfer number (ASIC will issue this via the vendor’s email within 24 hours of receiving the request); and
- providing you with this transfer number at settlement.
Following settlement, you will then need to login to the vendor’s ASIC Connect account and fill in the details of the transfer number and the registration to complete the transfer.
Transferring a Lease or the Grant of a New Lease
Most businesses operate from a physical shopfront meaning once the vendor sells the business, the purchaser will need a lease. Before settlement, you will need to:
- have vendor transfer the existing lease; or
- enter into a new lease with the landlord.
The length of time remaining on the current lease will affect your options. For instance, if you purchase a café and the lease will expire in three months from settlement, you will want to negotiate either a new lease or an extension so that the term is longer.
Assignment of a Lease
If parties decide to assign the lease, the seller must notify the landlord and see their consent to transfer the lease. They also need to provide you with the landlord’s details. In most instances, the landlord will request from you the following information:
- identification documents (e.g. driver’s licence or passport);
- financial information (e.g. salary, assets, profit and loss statements);
- business experience (e.g. previous businesses, years in the industry, employment history); and
- business references (e.g. professional referees).
The landlord will consider these details to make sure you can pay rent on time and take care of the property. Legally, the landlord cannot unreasonably refuse their consent to the transfer.
After the landlord gives their consent, they will prepare a deed of assignment. A deed of assignment is a formal document required to transfer the lease. The landlord, vendor and yourself must all sign the original copy.
You will need to prepare a transfer of lease form to transfer the lease, except in Victoria where this is not required. Both you and the seller must sign the form, which is then reviewed by the landlord. It is then stamped by the Office of State Revenue to complete the transfer.
Grant of a New Lease
If you enter into a new lease with the landlord, you must still provide the details outlined above. Parties may then decide to agree to or negotiate the terms of the lease before signing. The commencement date will be the same as the settlement date. As with an assignment of the lease, you must provide the landlord with a bank guarantee and a certificate of currency.
Following settlement, the landlord must register the lease (except if the property is in Victoria). The landlord prepares the registration forms after settlement, and you will most likely have to pay for the registration costs.
Transfer of Licences
The council or relevant authority will usually require businesses to have a licence to undertake certain activities. For many buyers, a liquor licence and food business licence are the most common. Each local council has different requirements so ensure you speak with your state’s relevant authority.
Authorised Use of the Premises
Another aspect of settlement that involves local councils is the permitted use and development approval for the shop. If you overlook this step, issues can arise that impact how the business operates. For instance, you run an outdoor dining area mistakenly believing you have authority to do so. The council may investigate your business after settlement and prevent you from continuing to use the outdoor dining area. You should also request the occupation certification (also called a certificate of classification or an occupation permit) from the local council to check the premises’ authorised use.
Checking the Equipment
As part of the settlement process, you should check each piece of equipment to make sure it is in good working order. If the purchaser does not do this, they may find that they have broken or unsuitable equipment to use from completion and will then need to have it repaired or replaced.
If there is equipment that is essential to the business, such as a coffee machine, or medical equipment, the purchaser may wish to have a professional inspector verify that there are no issues with this valuable asset. It is a commercial decision for the purchaser to make as to whether or not paying the inspector to assist is more beneficial to the business than the risk of an issue with this equipment after settlement.
Transferring the Employees
The purchaser is required to let the vendor know which employees they want to take on after settlement. Once they do this, the purchaser makes an offer of employment to those employees. Starting these agreements from the settlement date is sensible. Most sale of business agreements require you to make an offer of employment on substantially the same terms as their existing employment with the seller. After the transfer, employees continue with their employment as normal. The vendor must also pay employees who they have terminated any outstanding entitlements owed to employees on or before settlement.
Providing Requisitions
Once the parties have signed the contracts, it is common in most states and territories for the purchaser to provide the vendor with a list of questions for them to answer about the business. These are called requisitions. The type of questions you may ask include, is the:
- vendor aware of any legal proceedings which might affect the business?
- business or any assets of the business subject to any securities?
- vendor aware of any orders by the local government which affect the business or the business premises?
It is a way for the purchaser to find out more information about the business to make sure there are no outstanding issues before settlement takes place. In NSW, the standard form contract requires the purchaser to send the vendor their requisitions within ten days of signing the contract. If the vendor is unwilling to comply with a requisition on reasonable grounds, they can rescind the contract unless the purchaser waives the requisition. To rescind a contract means to put the parties in the position they were in before the contract was in place as if it had never happened.
Once the purchaser has received the vendor’s responses to the requisitions, they will need to see if they are happy with the information provided or if they require further clarification of the issues.
Releasing Securities
You must ensure any security interests over the business assets are released before settlement. For example, if the seller has a loan secured against the business, the bank may have registered a security on the PPSR. Before the assets are transferred to you, the seller must repay the loan or arrange for the security to be removed. If the security remains after settlement, the bank may still have rights over the assets.
Most sale agreements require the seller to remove all securities before settlement and provide proof. As a buyer, you should check the PPSR early and notify the seller of any securities, as releases can take time.
Transferring the Utilities
This often means working with the vendor to determine if they can transfer the utility accounts to you at settlement. Alternatively, you may wish to set up accounts with your preferred providers. Common utilities include:
- electricity and gas,
- internet, and
- EFTPOS.
Picking Up the Keys
The purchaser will need to pick up the keys from the vendor at settlement. The contract will usually set out the location for settlement. For example, the vendor’s solicitor may require settlement to take place at their offices at a particular time. In other cases, the parties may agree for settlement to take place electronically, especially when both parties live in different states.
Regardless of when and where settlement occurs, you will need to collect the keys from the seller on the day. It is usually done at the same time as when you pay the balance of the purchase price.
Conducting a Stocktake
It is common in a sale of business transaction (particularly those involving a café or retail business) to arrange a stocktake. In the sale of these businesses, the parties will usually exclude the price of the stock from the purchase price, as the levels of stock change weekly. It is important for the contract to set out the process for conducting the stocktake so that you know exactly how much to pay for the stock at settlement.
The contract should also include the maximum value required for the payment of the stock. That is so the purchaser can be sure that once they determine the value of the stock, they will not be required to pay more than the maximum value set out in the contract. Ideally, the stocktake will take place the day before settlement to give the purchaser time to organise the amount they will need to pay at settlement.
Some contracts, including the standard from contract in NSW, do not explicitly set out how the stocktake should occur. For this reason, the contract should include special conditions unique to the transaction.
Transferring Business Contracts
The vendor will need to transfer all the contracts which they have with third parties as part of the sale settlement process. For example, the vendor may have a contract with a wine supplier, and if they do not transfer this arrangement to the purchaser, the purchaser may have no supply of wine for the business at settlement. Ensure that the contract then includes special conditions that refer specifically to any significant business contract.
The special conditions should include a requirement for the vendor to assist you with entering into new agreements by:
- introducing you to relevant third parties; and
- providing any information necessary to the third parties to assist with the grant of the new arrangement.
You will need to confirm whether the seller can assign any contracts. If they cannot assign any contracts, the purchaser will need to enter into new arrangements with these third parties.
Common Settlement Delays
Even well-planned settlements can encounter delays. Understanding the most common obstacles helps you mitigate risks and keep your transaction on track, some of which are as follows:
- Landlord consent delays: Landlords may take time to approve assignments or add new conditions. Contact them early and provide complete documents.
- Finance approval delays: Loans can take 2–4 weeks and may require extra information. Arrange pre-approval before signing the contract.
- PPSR discharge issues: Delays can occur if there are multiple secured creditors. Run a PPSR search early and allow time for discharge.
- Employee documentation gaps: Missing employment records can cause problems. Request contracts, Fair Work documents and super details early.
- Licence transfer issues: Some licences cannot be transferred and need new applications. Check requirements with regulators as soon as possible.
- Stock valuation disputes: Disagreements can arise without clear terms. Set out how stock will be valued, who conducts the stocktake and how disputes are handled.
By anticipating these issues and building buffer time into your settlement timeline, you significantly reduce the risk of last-minute complications.
Key Takeaways
There are many steps involved in the settlement process to finalise a sale of business. It is especially important that you speak with a sale of business lawyer to ensure the sale settlement process runs smoothly.
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Frequently Asked Questions
The length of the sale settlement process will depend upon the completion date (also known as ‘settlement day’) stipulated in the sale contract between the purchaser and vendor. The time frame can be as short as seven days or as long as three months. Importantly, the sale settlement period may vary if there are a lot of assets to be transferred.
The vendor will likely transfer the business’ IP, including the business name, contact details of the business, email address, websites, domain names, trade marks, client lists and social media accounts as part of the sale settlement.
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