Buying or selling a small business can look straightforward at first. The parties agree on a price, prepare a contract, exchange documents and move toward settlement. In practice, however, business transactions often involve more than the headline price. A purchaser needs to know what they are actually buying, and a seller needs to understand what promises and obligations will continue after completion.
Early legal advice can help identify risks before a contract is signed. For businesses in Melbourne’s eastern suburbs, business and commercial legal advice can assist with contract terms, due diligence, disclosure issues and settlement arrangements.
What is being sold?
One of the first questions is whether the sale involves business assets, shares in a company, or another structure. An asset sale may include stock, equipment, business names, intellectual property, customer lists, goodwill and lease rights. A share sale usually involves the purchaser acquiring the company itself, including its assets, liabilities, contracts and history.
The distinction matters. A purchaser buying assets may be able to choose which assets and liabilities they take on. A purchaser buying shares may inherit more risk. Sellers also need to be clear about what is included and excluded, particularly where they intend to keep certain assets, trading names or customer relationships.
Due diligence should be practical
Due diligence is the process of checking whether the business is what the seller says it is. It should not be limited to a quick review of sales figures. A purchaser may need to examine financial statements, tax records, employee entitlements, supplier arrangements, equipment ownership, permits, licences, customer contracts and any disputes.
A business may appear profitable but still carry legal or operational risk. For example, key equipment may be leased rather than owned, staff entitlements may be under-recorded, or the business may depend heavily on one customer, one supplier or the seller’s personal relationships.
Sellers should also prepare for due diligence. Clear records can help reduce delays and support the value of the business. Poor records can lead to renegotiation, uncertainty or a failed sale.
The lease can be critical
For many small businesses, the premises are central to the transaction. A purchaser may not be buying much value if they cannot continue trading from the same location. The contract should address whether the lease will be assigned, whether landlord consent is required, and whether there are conditions attached to that consent.
Lease terms can affect value. Rent increases, options, permitted use, repair obligations, outgoings, relocation clauses and make-good requirements should all be checked. Where the transaction involves premises, property and conveyancing advice may be needed alongside business sale advice.
A seller should not assume that the landlord will approve an assignment automatically. A purchaser should not assume they can change the use of premises, signage, opening hours or fit-out without permission.
Restraints, warranties and guarantees
Business sale contracts often include restraints that limit what the seller can do after completion. A purchaser may want protection against the seller opening a competing business nearby or taking customers. A seller should make sure any restraint is reasonable and not wider than necessary.
Warranties are also important. These are statements about the business, such as whether accounts are accurate, taxes are paid, assets are owned, employees are properly recorded, and there are no undisclosed disputes. If a warranty is wrong, the contract may give the other party rights.
Guarantees can also arise, especially where a company is buying the business, signing a lease or obtaining finance. Directors and family members should be careful before giving personal guarantees. Independent guarantor advice before signing loan documents can help a person understand the personal risk before committing.
Do not leave legal review until the end
The best time to review a business sale contract is before it is signed. Once a contract is signed, negotiating changes is much harder. Early advice can help clarify the structure, identify missing documents, manage due diligence, review lease issues and reduce the risk of post-settlement disputes.
A well-managed transaction protects both sides. The purchaser knows what they are buying, the seller knows what obligations remain, and the settlement process is less likely to be disrupted by avoidable problems.