Buying a business is an exciting time. It’s the opportunity to be the boss and follow a passion that may have laid dormant as someone else’s employee. The process involved may also, understandably, overwhelm some purchasers. After signing the sale of business agreement, there is often a delay before you, the buyer, become the business owner. Settlement is when parties complete this transaction.
During this time, you must read the sale of business agreement to determine what the parties will transfer to each other. 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.
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.
At settlement, the purchaser then pays the balance of the purchase price to the vendor.
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
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, let’s say:
- 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).
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;
- domain names;
- trade marks;
- client lists; and
- social media accounts.
The purchaser is responsible for ensuring that the vendor transfers the business’ intellectual property at settlement.
It’s 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 doesn’t 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 must also provide the landlord with a bank guarantee and a certificate of currency. A bank guarantee assures the landlord that the bank will pay the amount of the guarantee if you default under the lease. A certificate of currency shows that the purchaser has public liability insurance. The landlord will require this in the event there is property damage.
You will then need to prepare a transfer of lease form that transfers the lease’s registration. Note that buyers in Victoria do not require this form. Both you and the vendor must sign the transfer of lease form which the landlord then reviews. The Office of State Revenue then stamps the form and will formally transfer the lease.
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.
If the seller’s lease has not yet expired, the seller and the landlord will need to enter into a deed of surrender to terminate their lease. Either party can prepare this deed which will they will sign at settlement.
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
Every sale of business agreement should also include a list of equipment that the vendor will transfer to the purchaser.
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.
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.
Often the business’ assets will have securities registered on the Personal Property Securities Register (PPSR).
It’s important you make sure that the third parties release these securities in time for settlement. Third parties can register security interests over property that they have an interest. For instance, if the vendor entered into a loan with a bank and granted the bank a security over the assets of the business, then the bank will have a security interest registered on the PPSR. The bank does this so that if the vendor defaults on the loan, the bank can take the assets of the business as payment instead.
If the vendor transfers these assets to you, then you must make sure the bank has removed their security interest before settlement. The vendor will need to pay out the remainder of the loan with the bank or come to some other arrangement with the bank that does not affect the assets of the business. If the PPSR has still listed a security over the assets after settlement, this means that the bank has an interest and could potentially deal with the assets.
Most sale of business agreements will have a provision requiring the vendor to ensure that they have released any securities in time for settlement and to provide the purchaser with a statement showing the release at settlement. It is important for the purchaser to notify the vendor of any securities that have come to its attention well in advance of settlement. Often, it can take some time to release settlements, especially when a bank is involved.
Transferring the Utilities
Make sure you confirm that the utilities are ready to go so to operate the business from the settlement.
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
Some can take up to two weeks to set up, so it’s important to get onto this once you sign the contract.
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’s 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. 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 can’t, the purchaser will need to enter into new arrangements with these third parties.
There are many steps involved in the settlement process to finalise a sale of business. It’s especially important that you speak with a sale of business lawyer to ensure the transaction runs smoothly. If you have any questions or need assistance either buying or selling a business, get in touch with LegalVision’s sale of business lawyers on 1300 544 755 or fill out the form on this page.
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