Purchasing a Business? Here are the Legal Questions You MUST Remember to Ask…

by Rose Lawyers on September 12, 2013

(Australian/Victorian law & generally) So you’ve decided to purchase a business – congratulations! Whether this is your first foray into business ownership or you’re adding the final piece to your empire, nothing beats that butterflies-in-the-stomach moment when you sign the lease and pick up the keys.

While your mind will no doubt impatiently race straight to raising your new adopted business baby into a booming goliath, there’s also the ‘other stuff’ to consider. You know, all that dreaded paperwork.

It’s easy to get lost in the minefield of permits, transfer fees and vendor warranties, particularly in Australian and even more specifically, in Victorian law. As a commercial and business lawyer, it’s common to see people get carried away by their dreams while neglecting the necessary legal diligence.

But fear not!

Here’s a checklist to guide you through some of the most important legal considerations of purchasing a business – so you can get back to daydreaming about the important things (like what colour you should paint the walls and how much you should spend on the espresso machine)…

Does the business have (or need) a permit to trade?

It sounds obvious, but you or your lawyer need to ensure you’re able to acquire the necessary permissions to run the business as you intend. You’ll also need to investigate whether the business has been denied a permit to trade in the past.

Does the business have potential for further improvement?

Do your research – maybe the current owner has hit the glass ceiling and is getting out while the going’s good. If the business can’t grow, you may struggle to get a worthwhile return on the capital and time and you’ve invested.

Is it possible that a competing business will open nearby?

Let’s say you’re purchasing a coffee house – you can pretty much guarantee that sooner or later, Starbucks will move in right across the street. How will you ensure your customers don’t abandon you? Have a long-term strategy in place that allows for a worst case scenario so you’re prepared when Seattle’s finest begin grinding away your customer base.

Does the Section 52 Statement that has been prepared by the agent for the vendor reflect the true financial position of the business?

Here in Victoria, a vendor selling a business (or part of a business) for $350,000 or less (excluding stock) must legally provide a prospective buyer with a Vendor’s Statement – also known as a ‘Section 52 Statement’. You and/or your lawyer should take care to ensure the sale amount stated on the statement is an accurate reflection of exactly what you’re buying – once this is signed, there’s no renegotiating.

Does the Contract of Sale offered by the vendor provide appropriate protection for the purchaser (e.g. Vendor Warranties)?

When buying an existing business, it’s standard that the contract will include warranties to ensure the buyer doesn’t end up with fines or legal proceedings due to actions of the previous owner.

An example is the vendor’s confirmation that any work done to the property has been completed with the necessary permits being obtained. This way, if you’re issued with a penalty or fine because of something they’ve done to the property, you’re not liable.

What is the relationship between the vendor and the Landlord?

If the business seller has neglected their obligations as a tenant, then the landlord will be happy to see the back of them. That said, the poor relationship could put you on the back foot with the landlord, who may have come to view the business itself as the problem. Where possible, it’s always worth having a chat with the landlord to see what their sentiments are towards the business and the seller.

In the situation of a food-handling business, are there potential problems that will cause the Health Department to issue orders against the business?

Do you have appropriate food handling qualifications? And if liquor is sold, do you have the appropriate liquor sale qualification? If the vendor is selling because they’ve been denied the necessary permits, or if they’ve been operating without the correct ones, this could also cause untold problems once you take over. Your lawyer will be able to conduct a simple background check to ensure that peachy-looking grocery store isn’t in fact a lemon.

If the business is part of a franchise, what are the requirements of the franchisor for the transfer of the business?

Perhaps that prime sandwich chain location you’ve got your eye on requires a ludicrous franchise transfer fee on top of steep ongoing royalty payments. In return, you’ll want to make sure you’re getting value for that money – does the franchisor have a record of assisting franchisees in the improvement of the business? The last thing you want is to fend for yourself while the parent company dips endlessly into your coffers.

If you’re signing a Shopping Centre Lease, what onerous demands and expenditures are going to be expected in the foreseeable future from the purchaser?

Shopping centres often require additional contractual agreements, such as financial contributions to centre maintenance and for your business premises to be kept in a certain condition. Also remember that the same rules don’t always apply to each business – a free-standing watch repair stall will probably be subject to different restrictions than the gargantuan furniture store it stands outside. Whether or not you’ve read the centre’s requirements before you sign your lease, you’re still obliged to follow them.

Do you have sufficient funds to meet the expenditure of the business for three to six months?

This is more a question to ask yourself. Even if your market research points to plain sailing, that ‘Under New Management’ banner may turn existing customers away. Do you have enough cash to see you through the rebuilding period?

Is the vendor prepared to help the purchaser to become familiar with the business, its suppliers and its customers?

Another way to make sure customers don’t abandon the existing business is to ensure you hit the ground running – perhaps the seller is happy to help you find your feet? If they can help make the transition as seamless as possible, the benefits will be significant.

And finally, always remember the golden rule – never, ever sign anything without consulting a lawyer!

Rose Lawyers
For 35+ years, Rose Lawyers has provided first-rate legal expertise to Melbourne's local and business community. The firm is particularly skilled and experienced in providing legal advice pertaining to: - Buying and selling of property - Wills - Probate - Matrimonial mediation - Personal injury/litigation - Employment contracts - Bank guarantees - Commercial and consumer oriented problems. In addition, Rose Lawyers is a highly regarded bastion of commercial and business law expertise and are considered experts in: - Business partnerships - Lease problems - Compliance issues - Succession planning - Contractual misunderstandings - GST and capital gains tax issues - Landlord and tenancy - Notary public issues - Town planning issues.

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