Buying or selling a business in QLD and the sale contract

Most people negotiating a business sale spend nearly all their energy on the price and almost none on the contract. Yet it is the contract that decides what matters afterwards, including what you got, who carries which liability, whether the staff came across, and whether the seller can open up again down the road.

The price is one line in that document, and the rest of it, covered below, is where deals go wrong. Getting a business sale contract right is commercial law work, and it is worth having done before you sign rather than after.

Buying the business or buying the company

These are different transactions and people use the words interchangeably.

In a business sale, also called an asset sale, you buy the parts, meaning the equipment, the stock, the customer list, the name, the goodwill and the lease. The company that ran it stays with the seller, and so does most of its history.

In a share sale you buy the company itself. Everything it owns comes with it, and so does everything it owes, including things nobody has told you about yet.

Buyers usually prefer an asset sale for that reason. Sellers often prefer a share sale for the same reason in reverse, and the tax position can differ between the two. Which structure you're in changes the risk profile completely, so make sure you know which one applies.

Due diligence for buyers

The seller knows the business and you don't, so due diligence is your only chance to close that gap. It has to happen before you're locked in.

These are the areas worth going through properly.

Start with the financials, and go beyond the profit and loss the broker sent you to the bank statements, tax returns and BAS lodgements. Check that the reported numbers are in the bank.

Look at where the revenue comes from. A business with one customer at sixty per cent of turnover is a different asset from one with two hundred customers, whatever the profit line says, so ask what happens if that customer leaves.

The lease is covered below, and it's often the single most important document in the deal.

With the staff, find out who is running the business day to day, what they're owed, and whether they'll stay.

Check whether equipment is owned outright or financed, because financed equipment doesn't just come with the business.

For licences and registrations, find out whether the ones the business runs on can transfer to you at all, and how long that takes.

With contracts and suppliers, the question is whether key agreements can be transferred to you, and whether anyone's consent is needed.

Ask about any disputes on foot or brewing, with customers, staff or the landlord.

Finally, ask directly why they're selling, listen to the answer, and test it against what you've found.

What transfers, and what doesn't

This is the part that tends to surprise buyers after settlement rather than before. Employees don't simply come across with the assets. Their employment with the seller ends, and if they start working for you within 3 months doing the same or nearly the same work, the Fair Work transfer of business rules can apply. Those rules affect accrued entitlements and recognition of prior service. In some cases a buyer that isn't associated with the seller can choose not to recognise prior service for annual leave or redundancy, and the seller may then have to pay out untaken annual leave and redundancy pay. Get advice on this specifically, because it's a live cost and it's frequently missed until it lands.

Contracts with suppliers and customers may need the other party's consent before they can be transferred to you, and some may not be transferable at all.

Some licences and permits can be transferred and others can't, so the buyer may need to apply in their own name. In Queensland, for example, if you take over a business that holds a liquor licence, you must apply to transfer the licence, and you can't sell or supply liquor at the premises until you're granted an interim authority to trade. Allow time for this, because licence transfers can hold up when you can start trading.

The lease needs the landlord's agreement to be transferred to you, and that is not automatic.

The contract should be clear about which of the seller's debts and liabilities stay with the seller, rather than leaving it to assumption.

Checking the lease

For a cafe, a shop or anything else where location is the business, the lease matters as much as the price.

Before you go far, ask how long is left on it, what options to renew exist and whether they have already been exercised, and what the landlord requires before consenting to an assignment.

If the lease has eighteen months to run with no options, what you are buying is eighteen months of trading and a negotiation with a landlord who knows you need a new lease.

Retail shop leases in Queensland are governed by the Retail Shop Leases Act 1994, which includes disclosure obligations, and there are specific disclosure requirements when a lease is assigned in connection with the sale of a business. Our companion article on commercial and retail leases goes through that.

Restraint of trade clauses

A buyer's worry is that six months after buying a local business, the seller opens up two streets away and takes the customers with them.

A restraint of trade clause is meant to stop that, but a restraint has to be reasonable to be enforceable. Draft it too wide, covering too long a period or too big an area, and a court may not enforce it. Draft it too narrow and it doesn't protect what you paid for.

For a buyer, this clause is part of what protects the goodwill you're paying for. For a seller, it decides what you're allowed to do next with your working life, which deserves more than a glance on the day of signing.

GST, and the going concern question

The sale of a business as a going concern can be GST-free, but only where specific conditions are met. The ATO's conditions are that the sale is for payment, the buyer is registered or required to be registered for GST, and the buyer and seller have agreed in writing that the sale is of a going concern. The sale also has to include everything necessary for the continued operation of the business, and the seller has to carry on the business until the day of sale.

Whether a particular sale qualifies is a tax question as much as a legal one, and getting it wrong can be expensive. Involve your accountant early and put the position in the contract explicitly rather than assuming it. If the parties assume different things about GST, it tends to surface at settlement, when it's hardest to fix.

Due diligence for sellers

Most of the above is written from the buyer's side, but sellers have their own points to watch.

Get your paperwork in order before you go to market, with clean financials, a signed lease, current licences and employment records that add up. Businesses with messy records sell for less, or don't sell at all, because a buyer prices in what they can't verify.

Understand what you're warranting. A contract will contain promises from you about the business, and if they turn out not to be true, you can be liable after settlement.

Read the restraint before you sign it, rather than after you've decided what to do next.

Get the tax advice before you agree the structure. The difference between an asset sale and a share sale can matter to you personally, and by the time it's in a signed contract it's too late.

Where these deals fall apart

In our experience the common failure points are landlord consent that arrives late or not at all, employee entitlements that nobody priced, key contracts that turn out not to be transferable, financials that don't survive inspection, and a handshake agreement about something important that never made it into the document.

Almost all of that can be found out beforehand, which is why the work should be done up front, while walking away is still cheap.

If you're buying or selling a business in Cairns

The moment worth getting advice is before you sign anything, including a heads of agreement or a broker's offer form. The Queensland Government's business guidance describes a letter of offer as a legally binding document, and notes that business brokers generally have a letter of offer template for buyers to complete. Whether an early document binds you depends on how it's worded, so have it checked before you sign it.

We act for buyers and sellers in business sales in Cairns and across Far North Queensland as part of our commercial law work. If you've got a deal in front of you and you want the contract looked at properly, get in touch.