Buying a business in WA: Four questions every buyer should ask
By Stephanie Reeves, Paralegal
Are you thinking of buying a business? Consider these four things before taking the plunge into business ownership.
1. What is the business’s financial position?
Start by examining the business’s operations, financial performance, legal and tax compliance, consumer contracts and intellectual property and assets. This process of pre-purchase evaluation of a business is commonly known as “due diligence.” The due diligence process will enable you to verify the financial information relating to the business and any representations made by the seller or their agent. You must carry out your due diligence before signing a contract committing to the purchase to reveal any issues that may require further investigation or made a condition in the contract. It is worth asking a lawyer to draft a clause in the purchase agreement that makes it subject to due diligence.
2. Is there a lease in place?
Don’t overlook the lease of the business premises during the due diligence process. Make sure you completely understand and agree to the terms of the lease before the lease is assigned to you. If you are signing the contract to purchase the business you should make it subject to your review and satisfaction with the terms of the lease.
When reviewing the lease, you need to pay particular attention to:
- whether the use you intend for the premises is permitted and also check the relevant zoning codes to confirm that the use is permitted under local government regulations;
- the balance of the term of the lease and options;
- the rent and any impending rent reviews;
- the type and amount of security;
- any pre-existing defaults by the seller;
- onerous make good provisions; and
- ownership of chattels fixtures and fittings and any pre-existing charges on them.
Do not take possession of the business prior to the assignment of the lease of the premises even when pressured to do so by the seller or his/her agent. If the landlord does not consent to the assignment, you could find yourself with a business without a premises.
3. What is vendor finance?
Vendor finance is where the seller finances part or all of the purchase. The finance is structured as a loan drawn on the settlement date. The terms and conditions of the loan should be recorded in writing in an agreement, including, but not limited to, the interest, repayment date and the details of the security for the loan, if required by the seller.
4. Do I need a settlement agent or a lawyer?
You are not required to engage a settlement agent or lawyer, however, if you consider the time, money, effort and energy you will be investing into the business, it makes sense to appoint someone skilled and knowledgeable to settle the business on your behalf. Rookie mistakes could cost you your deposit or thousands of dollars in legal costs if you have to appoint a lawyer to fix things if they go wrong.
Typically, a settlement agent or lawyer will assist you by:
- Conducting searches on the business assets to determine if they are free from encumbrances
- Conducting searches on the business owners to ensure they actually own the business
- Making enquiries with the local government on the business licences and registrations required to operate the business
- Adjusting all income and expenditure of the business
- Submitting the sale agreement for stamp duty assessment
- Obtaining employee transfer details
- Registration of transfer of business name
In the course of settlement, you will inevitably require some legal advice on your rights and obligations under the contract. Remember, while some settlement agents can do a business settlement, they cannot provide you legal advice.
If you would like any assistance in settling a business, preparing a sale agreement or a vendor finance agreement, please CONTACT US.
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