Buying a business is exciting — but it also carries significant legal and financial risk. Many buyers focus on the commercial opportunity and underestimate the importance of proper legal due diligence. Here is a practical checklist of the legal steps every buyer should take before committing.
1. Engage a Lawyer Before You Sign Anything
The most important step is the first one: do not sign a heads of agreement, letter of intent, or business sale contract without legal advice. Even documents described as "non-binding" can create obligations or start time periods running. Get advice first.
2. Decide on the Structure: Asset Sale vs Share Sale
Most small business purchases are structured as asset sales — where you buy the business assets (goodwill, equipment, stock, leases) rather than the company itself. This is generally preferable for buyers because you do not inherit the company's historical liabilities.
A share sale involves buying the shares in the company that operates the business. You inherit everything — including any hidden liabilities. Share sales require significantly more due diligence and are more common in larger transactions.
3. Conduct Thorough Due Diligence
Due diligence is your opportunity to investigate the business before you are committed. Key areas to examine include:
- Financial records: Three years of profit and loss statements, BAS returns, and tax returns. Are the numbers consistent? Do they stack up?
- Existing contracts: What contracts does the business have with suppliers, customers, and employees? Are they assignable?
- Leases: What are the terms of the premises lease? Can it be assigned? How long does it have to run?
- Employees: How many employees? What are their entitlements? Are there any underpayment issues or unfair dismissal claims?
- Intellectual property: Who owns the trademarks, website, social media accounts, and business name?
- Licences and registrations: Does the business hold the licences it needs to operate? Are they transferable?
- Debts and liabilities: Are there any outstanding debts, legal proceedings, or ATO liabilities?
4. Review the Business Sale Contract Carefully
The business sale contract sets out exactly what you are buying, the purchase price, what happens to employees, restraint of trade provisions, and the vendor's warranties and representations. Key clauses to scrutinise include:
- What is included: Make sure the contract lists every asset you expect to receive — goodwill, equipment, stock, client list, phone numbers, website, social media.
- Restraint of trade: The vendor should be prevented from starting a competing business nearby for a reasonable period after sale. Check the geographical scope and duration.
- Warranties: The vendor should warrant that the financial information provided is accurate and that there are no undisclosed liabilities.
- Conditions precedent: Common conditions include finance approval, satisfactory due diligence, and lessor consent to the assignment of the lease.
5. Negotiate the Lease Assignment
If the business operates from leased premises, you will need the landlord's consent to assign the lease to you. Some landlords use this as an opportunity to renegotiate terms or demand personal guarantees. We negotiate lease assignments on your behalf and ensure the terms are acceptable before you proceed.
6. Transfer Licences and Registrations
Depending on the type of business, you may need to transfer or obtain new licences — liquor licences, contractor licences, food handling approvals, and so on. Some licences are not transferable and must be applied for fresh by the buyer. Allow enough time for this process before settlement.
7. Handle Employee Entitlements Correctly
In most asset sale transactions, employees are treated as having been dismissed by the vendor and re-engaged by the buyer. If you choose to retain employees, their service may need to be recognised for certain entitlements. We advise on the correct approach to avoid unexpected liability.
8. PPSR Search
A search of the Personal Property Securities Register (PPSR) will reveal whether any secured creditor has a registered interest over the business assets you are buying. Buying assets that are subject to a registered security interest can mean the secured party has a claim over those assets — even after you have paid for them.
At James Papas Solicitors, we have been advising on business purchases in Parramatta and Western Sydney for nearly 50 years. Your first consultation is free. Call us on (02) 9633 3122.
Need legal advice? James Papas Solicitors offers free first consultations for all Business & Commercial Law matters. Our offices are in Parramatta and we serve all of Western Sydney. Learn more about our Business & Commercial Law services → or contact us today.