Buying or selling a business: the legal work involved

Buying or selling a business is one of the most complex transactions most owners undertake. The commercial terms — price, timing, transition — are only part of the deal. The legal structure determines what actually transfers, what liabilities the buyer inherits, how tax falls, and how the parties are protected if something is not as it seemed. Getting the legal work right at each stage prevents most of the disputes that follow.

Share sale or asset sale?

The threshold decision is whether the deal is a share sale or an asset sale.

• Share sale. The buyer acquires the shares in the company that owns and operates the business. The company keeps its contracts, licences, leases, employees and liabilities — good and bad. Simple in outline, but the buyer inherits everything, including the unknown.
• Asset sale. The buyer acquires the specific assets that make up the business — goodwill, equipment, stock, intellectual property, customer relationships — and the seller usually retains the historic entity and its liabilities. Contracts, leases and permits generally need to be assigned or re-issued.

Buyers usually prefer asset sales; sellers usually prefer share sales. The final structure often turns on tax, stamp duty and the identity of key third-party contracts.

Heads of agreement

Most deals start with a heads of agreement or term sheet. The heads set out the commercial framework: price, structure, conditions precedent, exclusivity and confidentiality, and any indicative warranties. Heads are usually expressed as non-binding in commercial terms but binding on process — exclusivity, confidentiality and costs. Get the labels right.

Due diligence

Between heads and contract, the buyer investigates the business. The scope depends on size and industry, but usually includes:

• Financial due diligence — often by the buyer's accountant.
• Legal due diligence — corporate structure, contracts, employees, disputes, intellectual property, leases, licences, insurance.
• Operational due diligence — customer concentration, supplier arrangements, systems.
• Regulatory due diligence — industry-specific approvals.

Due diligence generates the specific warranties, indemnities and conditions precedent that appear in the sale contract.

The sale contract

The contract is the heart of the transaction. It typically covers:

• Parties and definitions.
• What is being sold — the shares, or a defined list of assets.
• Purchase price and any adjustment mechanism.
• Deposit and payment terms — often including retention or escrow.
• Conditions precedent — landlord's consent to lease assignment, regulatory approval, finance, employee arrangements.
• Warranties by the seller — as at contract and as at completion.
• Indemnities for specific known risks.
• Restraint of trade preventing the seller from competing.
• Employee arrangements.
• Completion mechanics — what happens on the day.
• Dispute resolution.

Employees

In an asset sale, employees are not automatically transferred. The seller terminates and the buyer offers new employment. Continuity of employment can be preserved if the buyer recognises prior service — with significant implications for accrued leave, redundancy and long service leave entitlements. In a share sale, the employer entity is the same, so employees simply continue.

Leases

If the business operates from leased premises, the lease is one of the most important documents in the deal. Assignment requires the landlord's consent under nearly all commercial and retail leases. Where the lease is a retail lease under the Retail Leases Act 2003 (Vic), specific procedural steps and disclosures apply. Deals frequently hinge on the landlord's willingness to accept the incoming tenant.

GST and duty

• GST. A business sale is generally a taxable supply. Where the sale meets the going-concern requirements — both parties registered, agreement in writing before contract, buyer continues the enterprise — the supply is GST-free.
• Stamp duty. Duty on business assets depends on the particular assets — real property, plant, goodwill and intellectual property have different treatments. Share sales may attract landholder duty where the target company owns Victorian land above the statutory threshold.

Warranties and indemnities

Warranties are statements about the state of the business. If a warranty is untrue, the buyer can claim damages. Indemnities are promises to pay for specific known or possible liabilities on a dollar-for-dollar basis.

Common negotiation points include:

• The scope of warranties.
• Limitations on the seller's liability — cap on total claims, individual claim thresholds, time limits.
• The disclosure letter that qualifies warranties.
• Warranty and indemnity insurance in larger deals.

Completion

Completion is the point at which price is paid and ownership of the business (or the shares) transfers. Typical completion tasks include:

• Delivery of documents — share transfers, bills of sale, IP assignments, ASIC forms.
• Assignment or novation of contracts.
• Handover of records, keys, passwords, systems access.
• Payment of the purchase price (or the balance).
• Stock take, if part of the pricing formula.
• Communications with customers, suppliers and staff.

After completion

• Adjustments for stock, trade debtors and creditors.
• Handover period during which the seller helps transition the business.
• Ongoing warranty period during which the buyer may raise claims.
• Payment of any retention or escrow amounts.

For legal advice on buying or selling a business, see our business sales, purchases and transactions service and the broader commercial law area.

Preparing to sell

Sellers who prepare well before going to market achieve better outcomes. Financial statements should be up to date and consistent with tax lodgements. Key contracts should be located and reviewed for assignability. Employee entitlements should be reconciled. Intellectual property ownership should be confirmed — many small businesses discover during due diligence that trade marks are held in the name of a director or a related entity rather than the operating company. Correcting these issues before due diligence begins is far cheaper than correcting them once the purchaser's team has identified them.

Preparing to buy

Purchasers should decide their acquisition structure, confirm their funding, and identify the key questions they need to have answered before completion. Well-prepared purchasers instruct their lawyer and accountant at the same time and have a clear scope for the legal, financial and (where relevant) operational due diligence.

Warranties, indemnities and price adjustments

The sale contract typically contains warranties from the seller about the state of the business, indemnities in respect of specific known risks, and mechanisms for adjusting price at completion for stock, receivables and outgoings. Warranties are usually limited by disclosure, by monetary caps and by time. Indemnities are more targeted and are typically not subject to the same monetary caps. Negotiating these provisions occupies a substantial part of the legal work on any business sale.