Outside of owning your own home, owning your own business ranks as the most coveted of all Australian dreams. The autonomy, freedom from office politics, and opportunity to chart one’s own course are just some of the attractions. There is also the satisfaction that comes with growing a business, developing local customer relationships, and converting your hard work into a future exit.
Risks of Purchasing a Business
Yet purchasing a business does not come without its risks. In acquiring a business, you are also quite often acquiring long-term financial obligations. For example, a commitment to pay rent and outgoings under a lease or to comply with statutory employer obligations regarding accrued employee long service leave obligations. To manage these risks, a buyer needs to undertake financial and legal due diligence prior to becoming legally committed to buying the business.
Important Legal Due Diligence Considerations
Below are some of the more important legal due diligence considerations a buyer in the hospitality sector should consider before living the Australian dream:
1. Lease
Often the largest and most important commitment when buying a hospitality business is the lease. It can be a multi-year commitment. Key questions include:
- What, if any, are the outgoings?
- What is the potential for them to increase over time?
- Can they be capped?
- What do the most recent landlord rent invoices show regarding rent and outgoings?
- Is there a relocation or demolition clause in the lease?
- What are the make-good obligations at the end of the lease?
- Is there an option to extend the lease?
2. Long Service Leave
The law in Australia varies from state to state. For example, in NSW, the Long Service Leave Act 1955 provides that an employee with 5 or more years of continuous service accrues annual leave at the rate of 8.6667 weeks after 10 years. Buyers should ascertain the long service leave accruals of employees who are to stay with the business and determine the vendor’s contribution to that future obligation.
3. Intellectual Property
Is the business name registered?
What brand protection does the business have?
If a buyer wants exclusive rights to a business name, they need to apply to protect it with a trademark from IP Australia.
4. Apportionment of Goodwill and Plant and Equipment
A seller usually seeks to have the plant and equipment valued low for tax advantages. A buyer, on the other hand, wants these valued at market value or higher for depreciation purposes. It is advisable for both parties to agree on the apportionment price in the sale of a business agreement to avoid future scrutiny from the Tax Office.
5. Consents
Are the premises approved for their current use (e.g., restaurant, bar, café)?
Is there a liquor license? If so, is it suitable for the buyer’s needs?
What are the conditions of the liquor license and the permissible trading hours?
6. Restraints of Trade
A buyer typically does not want the seller to set up in competition with the newly acquired business. Restraint of trade clauses, if drafted correctly, can prevent the seller from eroding the buyer’s customer base. These clauses must be reasonably necessary to protect the buyer’s business interests to be enforceable.
Conclusion
The adage “look before you leap” is often apt for a buyer contemplating a purchase. Knowing where to look and what to ask for is crucial. What you find will determine whether you proceed with the purchase or negotiate a reduced price. For example, if the landlord’s rental invoices reveal larger outgoings than expected or there is no option to extend the lease, it may be commercially sensible to ask the seller to reduce the purchase price.
In our next article, we will discuss the importance of being earnest about warranties and indemnities in the business sale contract.
If you need support with any legal matters associated with purchasing a business, get in touch here: https://dempseyslawfirm.com.au/
