Buying a Business – Contract Review and Business Evaluation

Buying a Business

Settlement of a business is the process of transferring a business from one owner to another, usually between a Seller and a Buyer. There are various tasks that must be completed before legal ownership of the business is transferred.

People often ask “do I need a lawyer to settle a business?”. The answer is you do not need to engage a lawyer to settle a business. However, the process of buying or selling a business can be complicate and time consuming. Engaging a lawyer can help you to understand the process, your legal obligations and reduce the risks involved in buying or selling a business. it is important to obtain advice from qualified professionals and understand all steps involved. Engaging a qualified and experience lawyer will ensure your best interests are protected so you can be confident in your business investment. One key aspect of avoiding disputes relating to a business sale is adequately documenting all terms and conditions agreed upon by the parties.

In order to assist you in navigating this complex process, here are some of the important steps of buying a business:

  1. Contract review;
  2. Evaluating the business;
  3. Lease documentation review; and
  4. Pre-settlement, Settlement and After Settlement.

Step 1: Contract Review

After you have made the decision to buy a business, you will need to negotiate the key commercial terms with the Seller, the Seller or their lawyer will usually prepare a sale of business contract to send to you or your lawyer. The key commercial terms include:

  • Purchase price;
  • Proposed completion date (also called as Settlement Date); and
  • Plant and equipment you wish to purchase.

The contract may be in the form of a standard contract of sale such as REIWA agreement for the sale of business as a going concern. However, the contract could be tailored and specific to the particular sale of business. The type of contract will depend on the business itself and the terms of the sale agreed upon by the parties.

Once you received the draft contract, it is important to have it reviewed by a lawyer, so you understand your rights and obligations before signing the contract. Most contracts prepared by the seller’s lawyer will usually be drafted with clauses that are in the seller’s favour or lacking adequate protections to the buyer.

As the buyer, the review of the contract will generally involve reviewing:

  • The key terms of the contract, such as the purchase price, when the deposit is due, when and where the settlement will take place and whether these are the commercial terms you agreed upon with the seller;
  • Any restraint of trade clauses or warranties;
  • Any condition precedents – these are terms which will give you the rights to terminate the contract and have your deposit refunded in certain situations such as finance not approved or your dissatisfaction of due diligence;
  • Any special conditions; and
  • Your obligations upon signing the contract.

It is very important to consider the issues your lawyer identifies and how you would like to address them. In some cases, you may need to negotiate with the seller with regards to making amendments to the contract seeking better protection of your rights.

Once you are satisfied with the terms of the contract, the contract will be signed by the parties upon which it will become a legally binding document.

Step 2: Evaluating the business

It is important that you will conduct a thorough investigation to evaluate the business, known as due diligence. Due diligence can be carried out before or after you sign the contract with the Seller, however, if due diligence is to be carried out after the signing of the contract, it is imperative that the contract contains a “subject to due diligence” clause.

The scope of due diligence varies depending on the type of business but generally it will involve checking of:

  • The business’s operations such as business history, supplier accounts and stock inventory list;
  • Financial performance such as profit and loss statement for the past 2-3 years;
  • Legal and tax compliance;
  • Contracts with customer and suppliers and any other legal documents;
  • Lease agreements;
  • Intellectual property;
  • Assets; and
  • Other details.

If you are not satisfied with due diligence, you may decide to terminate the contract and have the deposit refunded to you, provided that the contract contains a “subject to due diligence” clause.

Please look forward to our next article as we will have a discussion regarding Lease Documentation Review and Settlement. For any questions about buying a business, please don’t hesitate to contact any one of our lawyers at AH2 Legal through 08 6161 0243.