Completing the purchase of a business

Before finalising your purchase of an existing business, offers and contracts will need to be prepared. With the support of your professional advisers, you will need to:

  • establish a value of the business separate to the seller's asking price
  • draft letters of intent to purchase the business
  • negotiate the purchase price with the seller
  • draft a purchase contract (agreement).

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Establishing a value

Once you have completed your due diligence, you will have an understanding of the business to determine its value. Your advisory team will help provide a value range and recommend a purchase price to offer.

Sellers will already have a value in mind and have consulted with their advisers on a suitable price range. Negotiations will follow to ideally find a price that is acceptable for both you and the seller.

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Purchasing a business

The 2 main methods for buying a business are asset sale and share sale.

An asset sale is when the buyer purchases the assets of a business, such as equipment, buildings, inventory, intellectual property (IP), franchise agreements and customer lists.

The business entity remains with the seller, meaning you are purchasing its assets, not the business itself. Any debts around these items still stay with the business.

For example, if a sole trader is selling a business, they are just selling the assets. The potential buyer must get their own ABN to operate under—a sole trader cannot transfer an ABN.

A share sale is when the purchaser takes ownership of the whole business. A company with shares sells the ownership of the company to a buyer, so they purchase everything—both the assets and the entity.

As the buyer, you become the shareholder and take ownership of all aspects of the business (e.g. assets, shares, trade names, debts). All rights and obligations of the business are included with the sale.

A share sale can be either:

  • a total price for all shares
  • a price per share.

If you are purchasing the business through a price-per-share arrangement, you will use a share purchase agreement.

Note that there may be tax implications for a share sale and you should discuss them with your accountant and financial adviser.

Purchasing a business involves negotiation between the buyer and seller based on the results of due diligence, where decisions are made based on facts without involving any emotions. If there are issues or concerns you have identified through the information and documents, you should negotiate to solve them to your satisfaction.

For example, if the sale comes with stock holding that has expired and is no longer in a sellable condition, these items can be negotiated or removed from the sale price.

Negotiation should be a fair process to ensure neither party is disadvantaged.

Process for making an offer

Follow these steps when making an offer to purchase a business.

A letter of intent outlines the proposed terms and conditions of the purchase and determines the timing and planning of the sale.

The letter can include a lock-out or exclusivity period that benefits negotiations with the seller. A solicitor or your professional adviser can help you draft the letter.

A letter of intent should:

  • be non-binding
  • include basic terms and conditions
  • include whether the offer is subject to a trial, finance or satisfactory lease
  • precede a final contract
  • be clear that the negotiations will be in the best interest of both parties.

A purchase price may be provided by the seller or their broker and is regarded as a starting point for negotiations.

Your accountant will be able to help with a fair value range for the business based on the financial documents provided during the due diligence phase.

Work with your advisers to understand the fair value range before making your offer.

It is very important to be clear on a price that:

  • you can personally afford
  • you could obtain finance for
  • you are willing to pay
  • realistically reflects the value and potential of the business you are buying.

In any negotiation, it is best to achieve a mutually beneficial result than one party being disadvantaged by the price or conditions.

Learn about effective negotiation skills.

Potential business buyers can choose to bring on partners or investors and fund the business without the need for a loan. You can also investigate if you can use superannuation for funding.

Generally, businesses require financing through a loan from a bank or other lending institution. You should consult with them as early as possible to discuss the possibility of obtaining a loan, what documentation is needed, and if any additional due diligence is required.

Find out more about funding your business.

A letter of offer is a legally binding document that contains key elements from the letter of intent with amendments based on the negations.

It is an important document that contains:

  • the final price
  • terms
  • conditions of sale.

Business brokers generally have a letter-of-offer template to complete, but you should still do this working closely with your solicitors and legal adviser so you fully understand what is included.

This letter must be accepted by the seller to proceed with the sale.

Once the letter of offer has been accepted, a purchase contract (agreement) will be drafted. Work with your advisers to draft the contract.

All purchase contracts will include conditions for both seller and buyer, and the documents mentioned previously need to be provided by a set date for the contract to proceed.

You should consult with your advisers before signing any agreement. Make sure you review your options and requirements for business structure, registrations and licenses before purchasing.

Checklist for drafting a purchase agreement

You should have a checklist that highlights aspects of the agreement and any items identified in the due diligence process.

Here is an example of a checklist template you can use prior to drafting agreements.

Component of your draft purchase agreement
Notes

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There are also other matters to be considered once offers and contracts are finalised, including:

  • an agreed settlement date where you become the legal owner of the business
  • arrangements with the previous owner to work within the business to help with the ownership transition for a certain time
  • a strategy to announce that the business is under new ownership, at the premise and through websites and social media campaigns
  • plans for contacting customers to maintain ongoing relationships.

Read more about getting your business ready to start trading.