13 Feb Some Things To Consider Before Buying A Business
Before a buyer can enter into a contract to purchase a business it is important to seek advice in relation to the most effective structure to use as the purchasing entity. There can be significant tax savings and other advantages if the correct structure is chosen before a contract is finalised.
Here is the most important piece of advice that your lawyer or accountant may not tell you in time. Are you ready? If you are investing money in the business as you almost always will, then you should make sure that this loan is treated as a loan and not a gift. You can lend this money to the business and secure it with a charge. If you register the charge then your initial investment will be protected forever. If things go bad, then you may be able to get your investment back even before the tax man gets paid.
So our first piece of advice is – “Begin with the end in mind”. This will be the cheapest and best insurance against losing your home that you may ever buy so when setting up a business get some good advice and set up this asset protection structure from the start.
Choice of structure can only be made with the assistance of the buyers accountant and lawyer. If these matters are considered at an early stage it may also be possible to ensure that your personal assets are protected if one day things go wrong.
Below is a list of things that a buyer should have available for the first meeting with their lawyer:
- The draft contract ( the seller usually prepares the contract and you should let your lawyer read the draft before it is signed ). If the draft contract or a letter of intent is properly prepared by the broker then this document will contain much of the information required.
- Copies of any leases given to you buy the broker or seller together with amending documentation e.g. extensions and variations
- Copies of any franchise agreement given to you by the seller.
- Copies of any licenses given to you by the seller
- Any other material that the broker or seller has given to you at any time including any details about the performance of the business
- Contact details for your accountant.
A business contract will impose many obligations on both parties. Some of these will need to be considered very early on in the process, including:
- The assignment of a lease or the negotiation of a new lease.
- The assignment of a business name and associated licenses
- The transfer of obligations relating to employees and their entitlements
- GST, Stamp Duty and other tax issues
- Restraints of trade
- Tuition and training of the buyer
- Representations and promises in relation to turnover and profit
- Calculation of Purchase Price and deposit
- Conditions precedent such as Due Diligence enquiries, finance, etc
- The handover of possession.
You should consider your requirements in relation to the above matters before your first meeting with your solicitor.
A Business broker or Lawyer will prepare the contract using a standard document produced by the Real Estate Institute of Queensland ( REIQ). Although the REIQ contract forms the basis of most business sale transactions in QLD it is a lengthy document and it’s correct completion requires some expertise. A full understanding of the way in which the standard conditions interact with the schedule is required before the schedule is completed. There are a number of issues created by the standard conditions that need to be carefully handled. Certain of the standard conditions attempt to remove a purchasers rights at intervals during the life of the contract. These kinds of clauses provide that a purchasers right to complain about various issues will only exist for a number of days after the contract is formed. Some of the rights which expire under these kinds of clauses are very important rights for a purchaser and include for example the right to complain if a purchaser is not satisfied, that the financial figures of the business are accurate. If a buyer neglects to obtain legal advice before signing the contract then the buyer is well advised to obtain legal advice as soon as possible after the contract is signed.
A business contract will almost always include special conditions. These conditions are not regulated in any way and must be carefully checked to ensure that they are acceptable. Any conflict between the standard terms of contract and special conditions must be resolved.
The REIQ business contract is an evolving document and significant changes are made to it by its publishers on a fairly regular basis. We monitor these changes as they occur.
Please contact us if you require assistance with a business purchase in Queensland.