Business Sale Contracts: The Basics

John Kafrouni

15 Sep 2011

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min read

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 lawyer for the sale of small businesses is the REIQ Business Sale Contract (2nd Edition). 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. They buyer must ensure that all 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: whether 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 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 businesses? 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 businesses 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 restricts the seller from setting up a competing business for a defined period in a defined radius of the business premises. Whilst this might benefit a business where customers are drawn from the locality (such as a cafe or convenience store) it does not go far enough for other types of businesses (such as a boat manufacturing business). In manufacturing, for example, you would need to restrain the seller from dealing with your customers, dealing with your suppliers, dealing with your retailers and poaching your staff.

Therefore, it is always important to seek legal advice on the contract, whether using the REIQ Business Sale Contract or not.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

Liability limited by a scheme approved under professional standards legislation.

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