Business Sale Contracts: The Basics
Here are the basics
When buying a business, the business sale contract is a critical part of the transaction. This is because this is the document that sets out what each party is going to do and what each party is going to get. Therefore, if something is missing, a party may not get what they expected.
In Queensland, the form of contract commonly used by business brokers and lawyers for the sale of small businesses is the REIQ Business Sale Contract. Often, the REIQ Contract will be initially completed by the business broker and then submitted to the seller’s solicitors to finalise. It is then submitted to the buyer’s solicitors. Whether using the REIQ Business Sale Contract or another contract prepared by the solicitors, all business sale contracts must address:
Assets: what assets am I buying for my money. The buyer must ensure that the seller does in fact own all the key assets and that they will be successfully transferred to the buyer. All assets of importance to the buyer (including intellectual property) should be itemised and included in the contract.
Stock: is the stock included in the purchase price or extra? If extra, how will it be calculated? Can the buyer reject stock? What happens if there is a dispute?
Goodwill: how is goodwill to be protected? Is the contract subject to the seller providing a period of tuition/assistance to the buyer to learn the ropes; is the seller prohibited from competing with the buyer for a period of time after completion; are key contracts with suppliers being transferred to the buyer?
Employees: what is the process for the buyer employing the employees of the business? Is the contract subject to any employees staying on after completion? How are accrued leave entitlements dealt with on transferring employees?
Premises/Lease: can the business be lawfully run from the premises? Does the lease allow the buyer to do what it needs to from the premises for a satisfactory period? Is there anything in the lease that may make it difficult to sell the business?
Licences and Permits: does the seller have all the licences and permits required to run the business? Are there any outstanding requisitions? Can the buyer successfully apply for or receive a transfer of such licences?
Liabilities: are there any product or service warranties that the buyer will need to honour; are there any debts payable by the business?
Money: what is the purchase price; what is the deposit; is the contract subject to finance?
The REIQ Business Sale Contract, whilst used for most small business sales in Queensland, will most of the time require some modification to suit the particular business. This is why the contract allows for “special conditions”. This is the section of the contract which modifies and adds to the standard conditions.
For example, a common variation to the REIQ Contract relates to the “restraint of trade” provision. The REIQ Contract restrains the seller and its directors, shareholders and associates from running a similar business, dealing with past clients, interfering with customers and poaching staff, but only within a prescribed area for a prescribed period. A restraint tied to an area around the premises may suit a business whose customers come from the locality (such as a cafe or convenience store). It may not protect a business whose customers, suppliers and retailers are spread across the state or the country (such as a boat manufacturing business), and the clause does not mention suppliers or retailers. In that case the restraint needs to be redrawn by special condition.
Therefore, it is always important to seek legal advice on the contract, whether using the REIQ Business Sale Contract or not.
Buying or selling a business? See Buying a Business in Queensland or Selling a Business in Queensland.
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Joe Kafrouni, Accredited Specialist in Business Law, Kafrouni Law
Disclaimer: This article is general information only and is not legal advice. Before acting on it, get advice on your own circumstances. To the extent the law allows, Kafrouni Law accepts no liability for any loss arising from reliance on it. This article is the copyright of Kafrouni Law.
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