Buying a business in NSW: what the contract must cover

What you are buying

The contract should list each asset:

1. Goodwill, including the business name, phone numbers, website, domain names and social media accounts.
2. Plant and equipment, by list.
3. Stock, and how it will be counted and valued at completion.
4. Intellectual property, such as trade marks.
5. The lease or the premises.
6. Contracts with suppliers and customers that will transfer to you.

It should also say what is excluded, such as cash, debtors and the seller's personal items.

Conditions to protect you

Common conditions include:

1. Finance approval.
2. The landlord's consent to the assignment of the lease, or a new lease.
3. Transfer of any licences the business needs.
4. Your review of the financial records.

Set a date for each condition, and a right to end the contract if a condition is not met.

Searches before completion

1. Search the Personal Property Securities Register against the seller. It shows whether a security interest is registered over the business assets. Clear assets are needed so another party cannot claim them after you buy.
2. Search ASIC for the seller company and the business name.
3. Check the council's records for the use of the premises.

The contract should require the seller to deliver the assets free of any security interest at completion.

The lease

For most businesses, the lease is critical.

Check its remaining term and options, the rent, and the make good clause.

The contract should be conditional on the landlord's consent.

For a retail shop lease, the seller must follow the assignment process in the Retail Leases Act 1994 to be released. Our article on assigning a lease explains the steps.

Employees

The contract should say which employees will transfer to you.

If an employee transfers, you must generally recognise their service with the seller for most entitlements, such as sick and carer's leave and parental leave.

For annual leave, either the leave carries over to you, or, in some cases, the seller pays it out.

The contract should set out who bears the cost of accrued entitlements, usually by an adjustment to the price.

GST and duty

A sale of a business can be GST-free as a sale of a going concern if all of these apply:

1. Payment is made for the supply.
2. The buyer is registered, or required to be registered, for GST.
3. The buyer and seller agree in writing that the sale is of a going concern.
4. The seller supplies all things necessary for the continued operation of the business.
5. The seller carries on the business until the day of supply.

Confirm the position with your accountant before you sign.

In NSW, goodwill, intellectual property and statutory licences are not subject to transfer duty. Land, interests in land such as a lease, and fixtures are. Some goods are dutiable if sold with dutiable property.

Restraint and handover

A restraint clause stops the seller from opening a competing business nearby for a set time.

Agree on the area and the period, and have the clause drafted with care. A restraint that goes too far may not be enforced.

The contract can also require the seller to train you and introduce you to customers and suppliers for a period after completion.

Common questions