Buying a business

Contributed by SulifaTonga, KirstyGrainger and DavidQin, as amended by EmanuelMasimo and current to February 2025

Business vs company

The distinction between purchasing a business or a company is often lost on many buyers. It is imperative that a potential buyer understands the distinguish between the two. For example:

• Purchasing a business: This typically involves buying the assets of a business, such as equipment, goodwill, inventory, and customer lists. The buyer may choose which assets and liabilities to assume. This method is common for small businesses and minimizes the risk of inheriting unknown debts or legal issues.
• Purchasing a company: This involves buying shares in a company, assuming ownership of the entire legal entity. The buyer inherits all assets and liabilities, including any undisclosed obligations or legal challenges. This option might be preferable when maintaining existing contracts, licenses, or corporate identity is important.

Each option has legal, financial, and tax implications, so it’s advisable to consult with professionals to determine the best approach for your situation.

Entity Purchasing the business

Like with determining whether to purchase the business or the company, a buyer must decide on the entity it will use to purchase the business. There are a range of different entities available to the buyer, all with their own advantages and disadvantages. Please refer to the chapter on business structures in NT Law Handbook for more information on business structures.

Due diligence

Purchasing an existing business offers several advantages over starting a new business from scratch:

• Immediate Operation: The business is already operational, allowing you to commence trading immediately
• Established Location and Equipment: The premises and equipment are set up, saving time and initial setup costs.
• Existing Customer Base: A loyal clientele can provide a steady revenue stream.
• Proven Track Record: Historical performance data helps assess the business's viability.
• Experienced Staff: Trained employees familiar with the business operations are often part of the purchase.

However, potential disadvantages include:

• Previous Issues: The business may have strained relationships with suppliers or clients.
• Outdated Assets: Equipment and processes may need upgrading.
• Hidden Costs: Unexpected expenses may arise, and returns might not meet expectations.
• Dependency on previous owner: The former owner's skills or relationships might have been critical to the business's success.

A buyer should conduct due diligence on the business to ascertain as much information on the business as possible. In particular, it is essential for a buyer to review and understand the following aspects of the business:

• Financial records: A buyer should independently collect and examine the past three to five years of the business's tax return, business activity statements, records of accounts receivable and payable, balance sheets, profit and loss statements, cash flow statements, asset and stock register, and sales records.
• Business operations: A buyer should seek to understand the motivations behind the sale; evaluate the location, equipment and stock, and strength and base of the clientele; determine the business's value and profit potential; research the competition and market; and review any applicable lease agreement. If the business requires a licence or registration to operate, the buyer should ascertain whether all necessary licences and registrations are valid and whether they are transferable or obtainable by the buyer.

There are two common methods used to determine the value of a business. The first is known as the capitalised value method, which examines potential future profit and return on investment. The second method values the business on the basis of the appraised value of assets. A person wishing to buy a business should seek advice from their accountant or business adviser for help in evaluating the business potential.

Business sale agreement

Once a buyer completes its due diligence, negotiations with the owner can commence. The central negotiation issue is typically the purchase price. A number of factors may affect the asking price of a business. The owner may wish to sell the business quickly due to health or financial reasons and therefore be willing to take a lower price. On the other hand, the owner may wish to negotiate the highest price possible and be willing to accept deferred payment. The purchase price for the business can be different from what it is worth.

The seller will typically prepare the first draft of the business sale agreement. The business sale agreement is an important document as it outlines the terms of the sale. It will deal with a vast array of issues, including:

• Purchase Price and Payment Terms: The agreed-upon sale price and details on how and when payments will be made (e.g., lump sum, instalments, deposits).
• Assets and Liabilities: A list of assets included in the sale (e.g., equipment, inventory, intellectual property) and any liabilities the buyer is assuming.
• Conditions Precedent: Specific conditions that must be met before the sale can proceed, such as financing approvals or regulatory consents.
• Warranties and Representations: Assurances provided by both parties regarding the condition of the business, financial statements, and legal compliance.
• Non-Compete and Confidentiality Clauses: Agreements restricting the seller from starting a competing business and protecting sensitive business information.
• Employee Arrangements: Terms regarding the retention or termination of current employees and their entitlements.
• Lease and Property Agreements: Details about the transfer or assignment of leases for business premises, if applicable.
• GST Considerations: Specifies whether the purchase price includes GST and if the sale qualifies as a GST-free going concern.
• Stamp Duty: Outlines who is responsible for paying stamp duty (typically the buyer), if applicable.

Negotiating a business sale agreement is a technical matter and requires extensive knowledge and experience. A buyer should seek expert advice during the negotiation process to ensure the best deal possible is achieved.

Post settlement

Once the business sale agreement has been signed and the transaction has settled (that is, settlement has occurred), the buyer should typically attend to the follow:

• lodge all statutory forms for transfer of licences with the various authorities
• apply online on the SIC National Business Names Register to transfer the registration of the business name to the buyer
• transfer or obtain new insurance policies to cover business operations and risks
• ensure all leases, supplier agreements, and service contracts are properly transferred and aligned with your business goals
• inform employees, suppliers, customers, and banks about the ownership change.

Resources

• Department of Industry, Tourism and Trade: This department provides guidelines for buying businesses and offers comprehensive business support services. Access resources at NT Industry.
• Business Enterprise Centre NT (BECNT): BECNT provides free assistance and services to business owners and startups: Business services - Darwin and the Northern Territory | Business Enterprise Centre NT.
• Territory Business Centres: These centres continue to offer business registration, licensing services, and business planning assistance: Territory Business Centre.
• NT Consumer Affairs (NTCA): Provides resources on business tenancies and consumer rights: Northern Territory Consumer Affairs.
• The Australian Government: The Australian Government provides useful information on its website about purchasing existing business: Buy an existing business | business.gov.au

Commercial leases

Most businesses operate from premises leased from a landlord. A person signing a commercial lease should read the document closely and seek legal advice before signing it.

The Business Tenancies (Fair Dealings) Act 2003 (BTFDA) governs most commercial leases in the Northern Territory. The protections afforded by the BTFDA do not apply universally; they depend on a range of factors including the premises and business being conducted on the premises.

Commercial leases are signed for a particular period of time ending on a specific date. A lease typically cannot be broken before that date without incurring a liability, unless the landlord and tenant both agree. Unless the tenant has an express right of renewal, it is generally at the discretion of the landlord whether to offer a lease renewal.

A lease should specify the agreed arrangements for paying rent. It should also state any additional payments the tenant may have to pay, such as council rates, water rates, building insurance, and costs of preparing the lease. Some shopping centres generally have additional requirements, such as a contribution towards promotions, security and building improvements, and these should be included in a lease. Stamp duty is generally not payable on leases in the NT, unless valuable consideration is given for the lease (in addition to or other than rent).

Questions a potential tenant should ask before signing a lease include:

• who will be responsible for maintaining the structure, fixtures, fittings, equipment and chattels?
• who will be responsible for removing the fit outs and fixtures in the premises at the end of lease?
• who is responsible for the legal costs of drawing up the lease?
• do the premises have the right zoning?
• what is the duration of the lease? Can it be renewed?
• who is responsible for outgoings such as rates, water, sewerage, gardening, air-conditioning charges and so on?
• what types of insurances are required for the premises?
• is there a relocation or demolition clause, where during the term of the lease you may be required to relocate elsewhere, in the lease?

A person should not sign a lease unless they agree to all the conditions contained within the lease.

In the context of buying a business, the buyer should ensure that they enter into a deed of assignment of lease that clearly absolves them of any liabilities incurred by the previously tenant prior to the assignment of the lease.

Resources

• NT Consumer Affairs (NTCA): Provides resources on business tenancies: Northern Territory Consumer Affairs.