Buying a Business in Western Australia: What You Need to Know

Buying an existing business can be an exciting opportunity. Rather than starting from the beginning, you may be acquiring an established customer base, existing revenue, trained employees, business systems, equipment, intellectual property and a recognised position in the market.

However, buying a business also involves significant financial and legal commitments.

What appears to be a successful business from the outside may have contractual obligations, lease issues, liabilities or other risks that are not immediately obvious. Once the transaction is completed, discovering those problems can be expensive and difficult to resolve.

For anyone considering buying a business in Western Australia, careful due diligence and properly prepared transaction documents are essential.

Before signing a business sale agreement or committing substantial funds, it is important to understand exactly what you are purchasing, what obligations you are assuming and whether the transaction is structured appropriately.

Here are some of the key matters to consider when buying a business in Western Australia.

1. Understand Exactly What You Are Buying

The first step is understanding what is actually included in the proposed transaction.

When someone says they are “buying a business”, that can involve acquiring a range of different assets and rights.

Depending on the business, the purchase might include:

• business names;
• plant and equipment;
• stock or inventory;
• customer databases;
• intellectual property;
• websites and domain names;
• telephone numbers;
• social media accounts;
• contracts;
• licences;
• goodwill;
• supplier relationships; and
• rights associated with commercial premises.

It is important that the sale agreement clearly identifies what is included and, equally importantly, what is excluded.

For example, you should not assume that equipment located at the business premises is owned by the seller. Some equipment may be leased, financed or owned by a third party.

Creating a clear schedule of the assets included in the transaction can help prevent disputes and unexpected problems after settlement.

2. Conduct Thorough Due Diligence

Due diligence is one of the most important stages of buying a business.

It gives the purchaser an opportunity to investigate the business and assess whether the information provided by the seller reflects its actual financial, legal and operational position.

The scope of due diligence will depend on the size and nature of the business, but it may involve reviewing:

• financial statements;
• tax records;
• business contracts;
• supplier agreements;
• customer agreements;
• employment arrangements;
• commercial leases;
• equipment and asset registers;
• intellectual property;
• licences and permits;
• insurance arrangements;
• existing disputes;
• loans and financing arrangements; and
• other significant business liabilities.

Due diligence should not simply be about confirming revenue.

A business can generate substantial revenue while also carrying significant expenses, contractual obligations or operational risks.

Legal and financial due diligence should therefore be considered together when assessing the transaction.

3. Review the Financial Position of the Business

Understanding the financial performance of the business is fundamental to determining whether the purchase price is justified.

A buyer may wish to review historical financial statements, profit and loss reports, balance sheets and other financial records with an appropriately qualified financial adviser or accountant.

Consider whether the revenue and profitability presented by the seller are sustainable.

Questions may include:

• Has revenue been increasing or declining?
• Are profits dependent on one major customer?
• Are there unusual expenses?
• Does the business have outstanding debts?
• Are there significant future expenses?
• Is the business dependent on the current owner’s personal involvement?
• Are the margins sustainable?
• Is the business seasonal?

It is also important to distinguish between the financial performance of the existing owner and what the business might look like under your ownership.

If the seller performs significant work without drawing a market salary, for example, the reported profitability may not accurately reflect the cost of replacing that work.

4. Review Important Contracts

Existing contracts can be extremely valuable to a business, but they can also create significant obligations.

As part of the purchase process, identify the agreements that are important to the continued operation of the business.

These may include contracts with:

• customers;
• suppliers;
• distributors;
• contractors;
• software providers;
• equipment providers;
• landlords;
• franchise networks; and
• other commercial partners.

You should determine whether those agreements can be transferred to you as the purchaser.

Some contracts may require the consent of the other party before they can be assigned.

Others may contain provisions allowing the other party to terminate the agreement if ownership or control of the business changes.

If a significant portion of the value of the business depends on a particular customer or supplier agreement, understanding whether that agreement will continue after settlement is particularly important.

5. Carefully Review the Commercial Lease

If the business operates from leased premises, the commercial lease can be one of the most important documents in the transaction.

A profitable business may be considerably less attractive if the lease is about to expire, the rent is scheduled to increase substantially or the landlord will not agree to transfer the lease.

Before completing the purchase, you should understand:

• the remaining lease term;
• available options to renew;
• current rent;
• rent review mechanisms;
• outgoings;
• permitted use;
• maintenance obligations;
• make-good obligations;
• guarantees and security requirements; and
• whether landlord consent is required for assignment.

If the location is essential to the success of the business, securing appropriate rights to occupy the premises should generally form an important part of the transaction.

A purchaser should avoid assuming that the existing lease will automatically transfer with the business.

6. Check Licences, Permits and Regulatory Requirements

Some businesses require specific licences, registrations, permits or regulatory approvals to operate legally.

Before buying the business, determine what approvals are required and whether they can be transferred to the new owner.

In some cases, the purchaser may need to apply for new licences rather than simply taking over those held by the seller.

This can be particularly important for businesses operating in regulated industries.

You should also consider whether any approvals are attached to the premises rather than the business itself and whether your proposed operations comply with relevant requirements.

Ideally, these issues should be identified before you become unconditionally committed to completing the purchase.

7. Identify the Business’s Intellectual Property

For some businesses, intellectual property can represent a substantial portion of their value.

This could include:

• business and trading names;
• trade marks;
• logos;
• websites;
• domain names;
• copyright;
• software;
• proprietary processes;
• databases;
• marketing materials; and
• other valuable commercial information.

The sale agreement should clearly identify which intellectual property rights are being transferred.

You should also investigate whether the seller actually owns those assets.

For example, a website, logo or software platform may have been developed by an external contractor. The relevant agreements may need to be reviewed to determine what intellectual property rights the business actually holds.

If a particular brand or piece of intellectual property is central to your decision to purchase the business, ownership and transfer should be properly addressed.

8. Consider Employees and Employment Arrangements

If the business has employees, you need to understand how they will be dealt with as part of the transaction.

Depending on how the sale is structured, issues may arise regarding ongoing employment, accrued entitlements and responsibility for particular employee-related obligations.

You should understand:

• which employees are expected to remain;
• their current roles;
• remuneration arrangements;
• accrued entitlements;
• length of service; and
• any important contractual arrangements.

Key employees may also be critical to the ongoing success of the business.

If much of the business’s knowledge or customer relationships depend on one or two employees, their willingness to remain after settlement may be commercially important.

Employment matters should therefore be considered as part of the broader due diligence process.

9. Consider Restraints on the Seller

When you purchase an established business, part of what you are often paying for is its goodwill.

That value could be undermined if the seller immediately establishes a competing business nearby and begins approaching the same customers.

For this reason, business sale agreements commonly contain restraint provisions intended to restrict certain competitive activities by the seller for an agreed period and within an agreed area.

The appropriate restraint will depend on the nature and location of the business.

Restraint clauses require careful drafting because their enforceability can depend on the circumstances and whether the restrictions are legally reasonable.

The objective should be to appropriately protect the goodwill being acquired without assuming that any restriction placed in a contract will automatically be enforceable.

10. Understand the Purchase Price and Adjustments

The business sale agreement should clearly explain how the purchase price will be paid.

Depending on the transaction, this may involve:

• an initial deposit;
• payment of the balance at settlement;
• adjustments for stock;
• adjustments for prepaid expenses;
• apportionment of certain liabilities;
• deferred payments; or
• other agreed arrangements.

Stock can be particularly important for retail, hospitality, manufacturing and other inventory-based businesses.

The agreement should explain how stock will be valued and whether there is a limit on the amount the purchaser is required to acquire.

A clear mechanism for calculating adjustments can help avoid disputes immediately before settlement.

11. Consider How the Purchase Will Be Structured

The legal structure used to acquire the business can have important consequences.

Depending on the transaction, the purchaser might acquire the assets of the business or acquire ownership interests in the entity operating the business.

These are not necessarily the same thing.

Different structures can involve different legal, financial and taxation considerations.

The appropriate structure will depend on factors including the nature of the business, its existing liabilities and the purchaser’s circumstances.

Before committing to a particular structure, it may be appropriate to obtain legal, accounting and taxation advice so the transaction is considered as a whole.

12. Make Sure Important Conditions Are Included

A purchaser may not want the business sale agreement to become unconditional immediately.

Depending on the circumstances, the transaction might need to be conditional upon certain events occurring.

These could include:

• satisfactory due diligence;
• obtaining finance;
• assignment of the commercial lease;
• landlord consent;
• obtaining licences or approvals;
• transfer of important contracts; or
• satisfaction of other agreed requirements.

Conditions should be drafted clearly, including deadlines and what happens if they are not satisfied.

Signing an unconditional agreement before completing important investigations can significantly reduce a purchaser’s options if a problem is discovered later.

13. Understand the Seller’s Warranties

Business sale agreements may contain warranties given by the seller about the business and the information provided to the purchaser.

These might relate to ownership of assets, contracts, disputes, financial information or other aspects of the business.

Warranties can provide important contractual protection, but they are not a substitute for proper due diligence.

Recovering a loss after settlement can be much more difficult than identifying a problem before the purchase is completed.

The preferable approach is generally to investigate important matters before settlement while ensuring the agreement appropriately documents the representations and protections relevant to the transaction.

14. Plan for Settlement and the Handover Period

Buying a business involves more than transferring money and signing documents.

There are often practical steps that need to occur around settlement to ensure the business can continue operating smoothly.

These may include transferring:

• keys and access credentials;
• business records;
• customer information;
• supplier accounts;
• telephone numbers;
• domain names;
• websites;
• social media accounts;
• software access;
• licences;
• equipment; and
• other operational assets.

Depending on the business, you may also negotiate a handover period during which the seller assists with introducing customers or suppliers and transferring important operational knowledge.

These arrangements should be documented clearly rather than relying on informal expectations.

15. Don’t Rush Into Signing a Heads of Agreement

In some transactions, the parties may prepare a heads of agreement, term sheet or similar preliminary document before the formal business sale agreement.

These documents can be useful for recording key commercial terms.

However, you should not automatically assume that a preliminary document has no legal consequences simply because a more detailed agreement will be prepared later.

Before signing, understand whether the document is intended to be legally binding, partially binding or non-binding.

Important matters such as purchase price, exclusivity, confidentiality, due diligence and proposed conditions may be addressed at this early stage.

Obtaining advice before signing can help ensure you do not unintentionally commit to terms that become difficult to change later.

Why Legal Advice Before Buying a Business Matters

Buying a business is a significant transaction.

The purchase price itself may represent only part of your overall exposure. Commercial leases, employee arrangements, contracts, guarantees, licences and other ongoing obligations can continue long after settlement.

A commercial lawyer can help you understand the legal aspects of the transaction and identify potential issues before you become committed.

This may include assisting with:

• reviewing or preparing the business sale agreement;
• legal due diligence;
• reviewing commercial leases;
• reviewing important contracts;
• identifying conditions that should apply to the purchase;
• negotiating contractual protections;
• considering intellectual property issues;
• coordinating settlement; and
• helping ensure relevant assets and rights are transferred.

Legal advice should also be considered alongside appropriate accounting, financial and taxation advice.

The objective is not simply to complete the transaction. It is to understand what you are purchasing and enter the business with greater certainty about your legal position.

Buying a Business in Busselton or the South West?

The South West is home to businesses across tourism, hospitality, retail, professional services, construction, agriculture and many other industries.

If you’re considering buying an established business in Busselton or elsewhere in the South West, obtaining advice early in the process can help you identify potential issues before they become expensive problems.

At Leeuwin Legal Collective, we provide clear, practical commercial legal advice to business purchasers and business owners.

We assist clients in Busselton, Dunsborough, Vasse, Yallingup, Margaret River and surrounding South West communities with business transactions and other commercial legal matters.

Our focus is on helping you understand the proposed transaction, identify legal risks and make informed commercial decisions with confidence.

Speak With a Commercial Lawyer in Busselton

If you’re considering purchasing a business, it is important to understand exactly what you’re buying before you commit.

Leeuwin Legal Collective can assist with reviewing and negotiating business sale agreements, conducting legal due diligence, reviewing commercial leases and contracts, and guiding you through the transaction and settlement process.

Book a free 15-minute consultation with our team today.

(08) 6716 9348

Clear advice. Practical solutions. Confidence for your business.