Buying or Selling a Business Without Losing Your Money
A SELF-PROTECTION CHECKLIST FROM DUE DILIGENCE TO SETTLEMENT
A business changing hands is often agreed over one dinner.
But the turnover on paper, the customers promised over the table,
and what you actually end up owning can be three different things.
You are buying verified facts, not the sign above the door | Source: Pexels
Bubble tea shops changing hands, restaurants sold as going concerns, small grocers passed on: we see these deals constantly, and they go wrong in remarkably similar ways. The buyer pays a "deposit" against a receipt, with no formal contract, and when the lease cannot be assigned the money cannot be recovered either. The new owner takes over, then learns the coffee machine and cool room belong to a finance company. The seller banks the final payment, then opens an identical shop two streets away. None of these traps is new, and proper transaction documents have a ready answer to every one of them. Keeping your money safe in a business sale is not about trust. It is about the process below.
01／First, what exactly are you buying?
Business sales come in two structures. In an asset sale, you buy the equipment, stock, goodwill, lease and business name, but not the seller's company itself; the old company's debts and history stay, in principle, with the seller. In a share sale, you buy the company's shares, and everything inside the company (including the tax debts, employee disputes and pending claims you don't know about) comes with it.
The great majority of small business deals should be asset sales, and buyers should be especially wary when a seller volunteers "just take over the company, it's simpler". The other side of simpler paperwork is inheriting the full historical baggage. Which structure to use is a decision for before any heads of agreement is signed, not after.
02／Due diligence: six things to verify with your own hands
First, the books. Never take turnover on someone's word. Cross-check two to three years of financial statements against the BAS lodgments. "The cash takings aren't in the books, that's why it looks low" translates to: you cannot verify it now and you will not be able to replicate it later.
Second, the lease. Half the value of the business is the location, and the location lives in the lease: how many years remain including options, whether assignment needs the landlord's consent, and whether the landlord can renegotiate terms on assignment. The contract must make the landlord's written consent a condition of completion: if consent is not obtained, the deal ends and the deposit is refunded in full. Every properly drawn standard contract contains this condition, which is exactly why a one-page heads of agreement plus a bank transfer is never a substitute for a formal contract. And as we covered last issue: the seller should confirm their personal guarantee is released on assignment.
Third, title to the equipment. Is the coffee machine, cool room or van owned outright or under finance? A few dollars on a PPSR (Personal Property Securities Register) search answers it. Any equipment with a registered security interest must be paid out and released by the seller before completion; otherwise you have paid for equipment that still belongs to the financier.
Fourth, the employees. Whether staff leave balances become the buyer's liability depends on how the buyer takes them on. If the employees are not retained, the seller pays out their entitlements on termination and the buyer is not involved. If they are retained, the rules run in two layers: accrued personal/carer's leave, and continuity of service for NSW long service leave, must be recognised by the new employer with no opt-out; accrued annual leave is different, because a buyer who is not an associated entity can give written notice before the employment starts that prior service will not be recognised, in which case the seller pays the annual leave out and the buyer starts clean. Do nothing, and the annual leave liability transfers with the employee. Whatever does transfer is dealt with by an adjustment against the price at settlement under the standard contract. In one sentence: whether you take the staff, and whether you give that written notice first, decides whose books this liability ends up on.
Fifth, the licences. The liquor licence, food business approvals and council use consents: are they transferable, how, and how long does approval take? If the licences cannot move, you have bought premises that cannot trade.
Sixth, the key contracts. Major customer contracts and exclusive supply agreements often contain change-of-control or no-assignment clauses. If the contracts fall away when the business changes hands, the turnover you are buying deserves a discount.
Due diligence: tick the items, not the vibes | Source: Pexels
03／Four insurances inside the contract
Deposit refund conditions. Spell out when the deposit comes back in full: landlord refuses consent, licence transfer fails, finance not approved. Do not let the deposit quietly become a fee for the seller's time.
Conditions precedent. Every item verified in the previous section (landlord consent, PPSR releases, licence transfers) should become a condition of completion: condition not met, deal ends, deposit returns.
Seller warranties. That the financials are true, there are no undisclosed debts, and no disputes or complaints are on foot. Warranties turn the seller's assurances into contractual obligations, giving the buyer a clear claim if they later prove false.
Handover arrangements. Agree that the seller stays on for a set number of weeks after completion to train, and to introduce suppliers and regulars. Turn the verbal "I'll show you the ropes" into a clause with a duration and consequences.
04／Restraint of trade: stopping the seller opening next door
A large part of what a buyer pays for is goodwill, and the biggest threat to goodwill is the seller. A restraint of trade clause stops the seller operating a similar business, and soliciting the customers and staff, within an agreed area and period. The key word is reasonable: courts only enforce restraints that are reasonably necessary to protect the goodwill sold. A restraint drafted to cover all of Australia for ten years risks being struck out entirely. In practice, cascading clauses set multiple tiers of area and duration so the court can uphold the reasonable tier. For a buyer, a well-drafted three kilometres for three years beats an unenforceable nationwide decade.
You are buying verified facts, not described prospects.
Every dollar spent on due diligence is insurance on the purchase price.
Sun Lawyers · Sydney Office
If you are buying or selling a business and need the contract drafted or reviewed, the lease assigned, or an independent eye over the numbers you have been shown, contact Sun Lawyers. We work in both English and Mandarin.
Phone: 02 9267 4988 ｜ Email: enquiry@sunlaws.com
Sydney Office: Suite 703 & 704, 265 Castlereagh Street, Sydney NSW 2000
Website: sunlaws.com.au
This article is general legal information only and is not legal advice.
Please contact us for advice specific to your situation.