You’ve found a business that you want to buy; you’ve agreed on a price, exchanged the contracts, paid the deposit, what next? This article will look at the process of settlement, and what each party is required to do at settlement.
There is a lot that needs to happen between the date the contract is signed and the date of completion (settlement date). Until the adjustment date, the vendor needs to pay the outgoings of the business, and they are entitled to the profits and takings of the business. From the adjustment date onwards, it is the purchaser who is entitled to the takings and liable for the outgoings. The “adjustment date” is the date on which the purchaser takes possession of the business – usually at the settlement date, or earlier.
The transaction is finalised at settlement; this means that the purchaser pays the vendor the balance money of the purchase price and the vendor hands over possession and the documents of title.
Calculating the balance money
The purchaser has already paid a deposit, usually 10% of the purchase price. This means the balance of the purchase
The money that needs to be paid by the purchaser at settlement needs to be adjusted so that it correctly reflects the money that the vendor has paid in the purchaser’s favour, and money that the vendor still owes to third parties or employees.
The vendor may have paid rent or other fees for a period after the adjustment date. Given that following the adjustment date, the purchaser has possession, those fees are benefiting the purchaser. The purchaser must, therefore, reimburse the vendor for the amount for the period between the adjustment date and the date up until the payment has been made. These amounts are added to the balance.
On the other hand, if there are payments that the vendor is behind on that have accumulated before the adjustment date, such as arrears of rent, the purchaser should not have to pay for this. These amounts are deducted from the balance.
Other payments that affect the balance money that is paid at settlement includes long service leave entitlements, annual leave entitlements, transfer of lease or licences and security deposits. Calculating these adjustments can be complicated, which is why you should get a lawyer to help!
What to bring to settlement
The balance money that needs to be paid will need to be paid in bank cheques and made payable according to the instructions given by the vendor.
The vendor will need to give to the purchaser the documents relating to the transfer of ownership and certificates of ownership of the business name, any patents or trademarks, equipment or chattels,
The vendor will also need to provide the books and records of the business, keys and security codes, and any third party permits or consents required.
If there is a lease for the premises of the businesses, there will also need to be the executed transfer or executed lease. Similarly, the executed discharge of mortgage or security interests and executed transfer of equipment leases will need to be brought to the settlement.