- business purchase
Buying an existing business is a common pathway for entrepreneurs and investors in Australia.
Compared with starting a business from scratch, acquiring an established business can allow buyers to enter the market more quickly. However, business acquisitions involve various legal considerations, including business structure, contracts, commercial leases, employee obligations, and regulatory compliance.
This article provides a brief overview of the key steps involved when purchasing an existing business in Victoria.
Step 1: Consider Your Business Structure Before Acquiring a Business
In Australia, a company and a business are two different concepts.
A company is a separate legal entity, usually involving:
- Australian Company Number (ACN)
- Australian Business Number (ABN)
- Shareholders and directors
A business generally refers to the commercial operation itself, which may include:
- Business name and goodwill
- Customer relationships
- Equipment and assets
- Commercial contracts
- Lease interests
For many buyers, establishing an appropriate business structure before acquisition can help to:
- Clearly define business responsibilities;
- Improve financial and tax management;
- Provide flexibility for future expansion or changes in ownership.
It is recommended that buyers seek advice from legal and accounting professionals before deciding on the most suitable structure.
Step 2: Conduct Thorough Due Diligence on the Business
When purchasing an existing business, the purchase price should not be the only consideration.
Before entering into a formal transaction, buyers should conduct proper due diligence to assess the business and identify potential risks.
Key areas to review include:
Financial Position
Including:
- Revenue history
- Profitability
- Cost structure
- Financial records
Business Operations
Including:
- Business model
- Customer base
- Supplier arrangements
- Industry conditions
Commercial Lease
For businesses operating from commercial premises, buyers should review:
- Remaining lease term
- Rental obligations
- Conditions for lease assignment
- Landlord approval requirements
Step 3: Review the Transaction Documents
Once the parties reach an initial agreement, buyers should carefully review the key transaction documents.
Contract of Sale of Business
The contract should clearly set out:
- Assets included in the purchase;
- Purchase price;
- Obligations of each party;
- Settlement conditions.
Commercial Lease
Buyers should confirm:
- Lease terms;
- Assignment requirements;
- Rights and obligations under the lease.
In Victoria, certain business transactions may also involve a Section 52 Vendor’s Statement.
This document provides important financial information about the business and may assist buyers in assessing the value and financial position of the business.
Step 4: Seek Legal Advice Before Signing
Before signing any legally binding documents, buyers should consider obtaining advice from a commercial lawyer.
A lawyer can assist with reviewing key issues, including:
- Whether the assets included in the transaction are clearly defined;
- Whether there are undisclosed liabilities;
- Ownership of equipment and intellectual property;
- Employee obligations;
- Lease assignment requirements;
- Representations and warranties in the contract.
Obtaining legal advice at an early stage can help buyers identify potential risks and avoid disputes after completion of the transaction.
Conclusion
Purchasing an existing business is not only a commercial investment, but also an important legal transaction.
From business structuring and due diligence to contract review and lease arrangements, each stage can have a significant impact on the future operation of the business.
Obtaining professional legal advice before completing a purchase can help buyers better understand their obligations, manage risks, and make informed decisions.
Disclaimer: This article provides general information only and does not constitute legal advice. Every business transaction is different. If you require advice regarding a specific business acquisition, you should seek advice from a qualified legal professional.
