Buying a Business Melbourne: A Legal Guide for New Buyers
Introduction
Buying an existing business in Melbourne can be one of the most effective ways to enter a market or expand an operation you already run. It can also be a transaction in which a great deal goes wrong between the initial agreement and completion. Many buyers approach a purchase as though the important questions are the price and the settlement date. In practice, those are among the simpler matters to resolve. The harder work lies in understanding precisely what you are acquiring, what obligations travel with it, and whether the parts of the business that give it value can actually be transferred to you.
When you buy a business you are rarely buying a single thing. You are acquiring a collection of assets, contracts, relationships, employees and, depending on how the transaction is structured, liabilities. A supplier arrangement that underpins the entire operation may not be transferable without consent. The lease that ties the business to its location may have only a short term remaining. Equipment on the floor may be subject to a security interest registered by a financier. Each of these issues is manageable when it is identified early, and considerably harder to remedy once you have signed.
This guide explains the legal issues a prospective buyer in Australia should understand before committing to a purchase. It is written for business owners and entrepreneurs, and it concentrates on the practical questions that determine whether an acquisition is sound. Understanding these matters before you sign gives you both the information and the leverage to negotiate the transaction on terms that genuinely protect you.
What Should You Check Before Buying a Business in Melbourne?
The investigation a buyer undertakes before committing to a purchase is usually described as due diligence. In plain terms, it is the process of finding out what you are buying so that there are no material surprises after completion. Good due diligence does more than confirm that a business exists and generates revenue. It tests the assumptions on which the purchase price is based, and it surfaces the risks that a vendor may not necessarily be obliged to volunteer. The main areas a buyer should investigate are set out below.
Financial information
The financial position of the business is the foundation of the price. A buyer should understand revenue, expenses, profitability, outstanding debts, stock levels and the trend of financial performance over a meaningful period rather than a single favourable quarter. The figures presented by a vendor are a starting point, not a conclusion. Interpreting them, and testing whether the reported profitability is sustainable, is properly the work of your accountant, and legal and financial due diligence should proceed together rather than in isolation.
Where the business is a small business; that is, where the total price for goodwill, plant, equipment and fittings is $450,000 or less, disregarding stock, the vendor must give you a statement under section 52 of the Estate Agents Act 1980 (Vic) before you sign any contract or pay a deposit and must obtain your written acknowledgement of receipt. The statement is in a prescribed form and sets out the trading and financial position of the business over the two preceding accounting periods and the current period up to the most recent quarter. If the statement is not given, or is incomplete or inaccurate, you may avoid the contract within three months of signing provided you have not taken possession, and recover money paid. The statement is not a substitute for due diligence: it is a minimum disclosure, prepared from the vendor's own figures, and the fact that it has been provided says nothing about whether the figures are reliable.
Contracts
Most businesses depend on a small number of contracts that matter far more than the rest. Customer agreements, supplier and distributor arrangements, software licences and equipment finance can each be fundamental to the operation. A buyer needs to identify these agreements, review their terms, and establish whether they can continue after a change of ownership. Some contracts transfer automatically, some require the other party to consent, and some contain provisions that allow the counterparty to terminate on a change of control. A business that looks robust can lose much of its value if a key contract cannot be carried across.
Employees
Employees are often among a business’s most valuable assets, yet buyers frequently underestimate this area at the outset. A buyer should review existing employment arrangements, the terms of engagement, and any accrued entitlements. These issues should be addressed before completion, not left as an afterthought, because they affect both the purchase price and the continuity of the business. We discuss this in more detail below.
Premises
If the business operates from leased premises, the lease can be as important as any other asset. A buyer should not assume that occupation simply continues under new ownership. For many businesses the location is inseparable from the goodwill, and a weak or short lease can undermine the whole transaction. We discuss the lease in more detail below.
Assets
It is important to establish exactly which assets are included in the sale and which are excluded. Plant, equipment, fit-out, stock, customer lists, intellectual property and goodwill may all form part of the transaction, but only if the sale agreement says so. Assets that appear to belong to the business are sometimes leased, financed or owned by a related entity rather than the seller. Confirming ownership, and confirming that the relevant assets are free of security interests, is a central part of due diligence.
Disputes and liabilities
Existing claims, disputes and potential liabilities can follow a business or its owner, and their significance depends heavily on how the transaction is structured. A buyer should ask whether the business is involved in any litigation, whether there are unresolved complaints or regulatory issues, and whether there are liabilities that may crystallise after completion. A dispute that seems minor to a departing owner can become the buyer’s problem, and its existence should be understood before the price is settled rather than after.
Intellectual property
Intellectual property is frequently central to a business and frequently overlooked in a purchase. Ownership and transfer of trade marks, business names, copyright, websites, domain names, software and other intellectual property should be confirmed rather than assumed. It is not unusual to find that a trading name is unregistered, that a domain is held in a personal account, or that important intellectual property is owned by a different entity from the one selling the business. Ownership of registered trade marks can be checked through IP Australia, and the transaction documents should ensure that everything the business relies on is actually transferred to you.
Asset Purchase or Share Purchase?
One of the first structural questions in any acquisition is whether you are buying the assets of a business or the shares in the company that owns it. The distinction is fundamental, and it shapes almost everything that follows, including the level of due diligence required and the way risk is allocated between the parties.
Buying the assets of a business
In an asset purchase, the buyer acquires specified assets and rights rather than the company itself. You might acquire the plant and equipment, the goodwill, the stock, the intellectual property and the benefit of certain contracts, while leaving the selling entity behind. Because the buyer takes only what is identified, the sale agreement must set out precisely what is included and what is excluded. An asset purchase can give a buyer a degree of separation from the history of the selling entity, but that protection is only as good as the drafting, and liabilities can still follow particular assets if the transaction is not handled carefully.
Buying shares in a company
In a share purchase, the buyer acquires the company itself. The company continues to own its assets and to owe its liabilities, and the buyer inherits its legal position as it stands, including matters that predate the sale. Because you are stepping into the company’s existing history, due diligence in a share acquisition can be particularly important. Warranties and indemnities carry more weight, and the review needs to extend to the company’s past conduct rather than simply its present assets.
What Duty and GST Apply When You Buy a Business?
The tax treatment of a business purchase is often the last thing a buyer considers and one of the first things that affects the net cost of the transaction. The position turns on what is being transferred and how the price is allocated, which makes it a matter to resolve while the agreement is being drafted rather than after it is signed.
In Victoria, duty is not generally charged on the transfer of business assets themselves under the Duties Act 2000 (Vic). Goodwill, intellectual property, plant and equipment transferred as part of a business are not ordinarily dutiable in their own right. Duty arises where the transaction includes an interest in land. Where you are buying shares rather than assets, the land rich or landholder provisions can bring the transaction into duty even though no land is transferred directly. The position depends on the assets involved and should be confirmed for the specific transaction.
GST is the other consideration. A sale of a business can be treated as a GST-free supply of a going concern where the statutory conditions are met, which include that the supplier carries on the enterprise until the day of the supply, that everything necessary for its continued operation is supplied, that the buyer is registered or required to be registered for GST, and that the parties agree in writing that the supply is of a going concern. That written agreement belongs in the sale contract. If the conditions are not satisfied, or the agreement is silent, the buyer can face a GST liability on the purchase price that was never priced into the deal.
Because duty and GST both depend on how the price is allocated across goodwill, plant, stock and any land, the apportionment set out in the sale agreement has consequences well beyond bookkeeping. Revenue authorities scrutinise allocations that do not reflect commercial reality, particularly in related-party transactions. The allocation should be settled with your accountant or tax adviser and then accurately recorded in the contract, so that the tax position and the legal documents are consistent.
The two structures also carry different tax and duty consequences, and there is no universal answer as to which is preferable. The right structure depends on the commercial, legal and tax features of the particular transaction. Because the taxation implications, including capital gains tax and duty, can be significant, these should be considered with your accountant or tax adviser alongside the legal advice, so that the structure you choose is sound on every front.
Working through a potential acquisition?
Legal issues in a business purchase are easiest to address before the terms are fixed. If you are assessing a business and want to understand where the risks sit, our experienced commercial lawyers can help you review the opportunity and structure the transaction sensibly. You can read more about how we assist buyers on our business purchase lawyer page.
Why Is Legal Due Diligence Important?
Rather than simply saying due diligence is important, it is more useful to explain what it achieves. Legal due diligence examines a business’s legal position so a buyer can make an informed decision and negotiate appropriate protections. Its value is clearest when it uncovers an issue that changes the commercial picture.
A buyer conducting proper due diligence may discover that a major customer contract cannot be transferred without the customer’s consent, that the lease has only a short period remaining with no option to renew, or that essential equipment is subject to a security interest registered to a financier. Each of these findings allows a buyer to respond while there is still room to move, whether by renegotiating the price, requiring the issue to be resolved before completion, or building specific protection into the agreement. Discovered early, these are manageable issues. Discovered after signing, they can be expensive problems.
What Should Be Included in the Business Sale Agreement?
The business sale agreement is the document that records what is being bought, on what terms, and with what protections. In Victoria a standard form Contract of Sale of Business is commonly used as the starting point, and it is often heavily amended by the vendor’s lawyers to favour the seller. A buyer should never treat the agreement as a formality to be signed once the price is agreed, because the terms determine how risk is shared and what recourse you have if something is not as represented.
A well-drafted agreement will address the purchase price and deposit, the assets included and excluded, the treatment of stock, and any conditions that must be satisfied before completion. It will deal with warranties and indemnities, the allocation of liabilities, the arrangements for employees, the transfer of contracts and intellectual property, and any restraint on the seller. It will also set out confidentiality obligations, the mechanics of completion, and the circumstances in which a party may terminate. The precise terms depend on the nature of the transaction, but the agreement is where the protections identified during due diligence are either secured or lost. Reviewing and negotiating commercial contracts of this kind is a central part of the work involved in a purchase.
What Happens to Employees When You Buy a Business?
Employee arrangements need to be considered before completion, because the answers depend on how the transaction is structured and cannot simply be resolved afterwards. In an asset purchase the buyer is not automatically obliged to employ the seller’s staff, and where the buyer does offer employment, questions arise about which entitlements carry across and on what basis.
Accrued entitlements such as annual leave and long service leave, the recognition of prior service, and the treatment of redundancy all need to be worked through as part of the transaction. Long service leave in particular is governed by state legislation and has its own rules about continuity of service where a business changes hands. Awards and enterprise agreements may apply to transferring employees, and existing employment disputes can affect the value or the risk of the acquisition. The correct treatment of transferring employees depends on the circumstances and the structure of the deal, so definitive conclusions should be reached with advice rather than assumed. Getting the employment arrangements right protects both the buyer and the people who make the business work.
What Happens to the Business Lease?
For many businesses the premises are fundamental to both value and operation, which makes the lease one of the most important documents in the entire transaction. A buyer should never assume that a lease transfers automatically with the business. In most cases the existing lease must be formally assigned to the buyer, and that assignment usually requires the landlord’s consent. The landlord may impose conditions, may seek personal guarantees, and is under no obligation to agree to terms that suit the buyer.
Before committing, a buyer should establish how much of the term remains, whether there are options to renew, and what the rent and outgoings will be over the life of the lease. The permitted use must allow the business to operate as intended, and the buyer should understand any make-good obligations that will fall due at the end of the term, along with any redevelopment or relocation clauses that could disrupt the business. Where the premises are used for retail, additional protections may apply under the relevant retail leasing legislation. A lease that appears routine can contain terms that materially affect the value of the business, which is why obtaining advice on commercial lease and, where relevant, retail lease arrangements is such an important part of a purchase. A short remaining term, an unfavourable review mechanism or a landlord who will not consent to assignment can each be enough to reconsider the transaction.
Should You Check the PPSR When Buying a Business?
The Personal Property Securities Register, or PPSR, is the national register that records security interests over personal property. Personal property in this sense covers a broad range of business assets, including equipment, motor vehicles, stock and other tangible and intangible property, but not land. A search of the register, maintained at ppsr.gov.au, reveals whether a third party such as a financier or supplier holds a registered security interest over the assets a buyer intends to acquire.
The risk for a buyer is straightforward. An asset can appear to belong to the business, and be offered for sale as though it is unencumbered, while in fact it secures a debt owed to someone else. If a buyer takes that asset without the security being dealt with, the secured party may be able to enforce its interest against the asset in the buyer’s hands. Checking the PPSR before completion allows a buyer to identify these interests and to require that they be released as a condition of the sale. Few steps in a business purchase offer as much protection for as little cost, a point we explain more fully in our article on PPSR checks.
Can You Transfer the Business Licences and Permits?
Many businesses cannot lawfully operate without a licence, permit or registration, and a buyer who completes a purchase without confirming the position can find the business unable to trade from the first day of ownership. Food premises registrations, liquor licences, labour hire licences, building and trade registrations, tobacco and vaping approvals, transport accreditations and environmental approvals are all examples of authorisations that a business may depend on entirely.
The critical question is whether the authorisation travels with the business or attaches to the holder. Many do not transfer at all. Some are personal to the individual or entity that holds them, which means the buyer must apply in its own right, satisfy the regulator's suitability requirements, and wait for a decision. Others can be transferred but only with the regulator's approval, and that approval may take weeks or months. A local council food registration, a liquor licence and a labour hire licence each operate under different rules and different timeframes.
For a buyer this has two practical consequences. The first is timing: an application that takes three months cannot be left until the week before completion. The second is risk allocation: where the business cannot operate without an authorisation the buyer does not yet hold, obtaining it should be a condition of completion rather than a matter of hope. Identifying every licence the business relies on, confirming how each one is dealt with, and building the necessary approvals into the conditions of the contract is a straightforward exercise that prevents a serious problem.
What If You Are Buying a Franchise?
Buying a franchised business introduces a further layer of legal considerations that do not arise in an ordinary purchase. In addition to the usual due diligence, the buyer is entering a regulated relationship governed by the Franchising Code of Conduct, and the transaction must comply with the requirements of that Code. A prospective franchisee should review the franchise agreement and the disclosure documentation carefully, because these documents define the rights and obligations that will govern the business for years.
The matters that require attention include the franchisor’s requirements for approving an incoming franchisee, the fees and marketing levies payable, the territory granted and whether it is exclusive, the conditions attaching to transfer and renewal, and any restraints that apply on exit. The premises are often tied to the franchise arrangement, so the lease and the franchise agreement need to be considered together rather than separately. Because a franchise purchase combines commercial acquisition with Code compliance, it benefits from advice that understands both. You can read more about the documents involved on our pages dealing with the franchise agreement and the disclosure document.
What Are Warranties and Indemnities?
Warranties and indemnities are among the most important protections in a sale agreement, and buyers benefit from understanding what each one does.
Warranties
A warranty is a contractual statement about the business or the transaction, given by the seller and relied upon by the buyer. Warranties might confirm that the financial information is accurate, that the assets are owned by the seller, that there are no undisclosed disputes, or that the business complies with relevant laws. If a warranty turns out to be untrue, the buyer may have a claim for the loss suffered. The value of a warranty depends on its precise wording and on the limitations that surround it.
Indemnities
An indemnity allocates responsibility for a specified risk or liability, typically requiring the seller to compensate the buyer if a particular loss arises. Indemnities are often used where a known or anticipated risk needs to be placed clearly on one party. The scope of the indemnity, any exclusions, financial caps and time limits all determine how much protection it actually provides. Warranties and indemnities are only as strong as the words used to express them, which is why they repay careful negotiation rather than acceptance in a vendor’s standard form.
What Is a Restraint of Trade?
When you buy a business you are usually paying, in part, for its goodwill: its reputation, its customer relationships and its established position in the market. A restraint of trade is a provision designed to protect that goodwill by preventing the seller from immediately setting up in competition and drawing customers back to a new venture. Without an appropriate restraint, a buyer can find that the value paid for the business walks out the door with the former owner.
A restraint in a sale of business typically addresses the geographic area in which the seller may not compete, the period for which the restriction applies, and the nature of the activities that are restrained, including approaches to former customers and employees. Restraints of this kind, given to protect the goodwill of a business that has been sold, are generally treated more favourably by the courts than restraints imposed on employees. Even so, enforceability is not guaranteed. A restraint must go no further than is reasonably necessary to protect the legitimate interest being purchased, and whether a particular restraint is enforceable depends on its drafting and on the circumstances of the case.
What Happens at Settlement?
Completion, or settlement, is the point at which the transaction is performed and ownership passes. It is more involved than a simple exchange of money, and a buyer who understands what happens on the day is better placed to ensure nothing is left unresolved.
Settlement typically involves the payment of the balance of the purchase price, the transfer of the assets, and the delivery of the documents that give effect to the sale. Where there is a lease, the assignment documentation is completed and any bank guarantee or security deposit arrangement is dealt with. Any security interests disclosed on the PPSR should be released, with evidence provided. Employee arrangements take effect, keys and access are handed over, and the transfer of business names, domain names, trade marks and supplier and utility accounts is put in motion.
Two mechanical matters deserve particular attention. Stock is usually valued by a stocktake at or immediately before completion and paid for separately from the headline price, so the method of valuation and the treatment of obsolete or damaged stock should be agreed in the contract rather than negotiated on the day. Outgoings such as rent, utilities, rates and licence fees are apportioned between the parties as at the completion date, and the adjustment statement needs to be checked rather than accepted.
A buyer should also think beyond the settlement itself. Customers and suppliers need to be told, banking and merchant facilities need to be in place, insurance must be effective from the moment risk passes, and the buyer's own registrations must be current. Where the vendor has agreed to provide a handover or training period, that obligation belongs in the agreement with defined dates and hours rather than resting on goodwill. A well-prepared completion is largely a matter of having anticipated each of these items in the contract.
When Should You Engage a Business Purchase Lawyer?
The most useful time to obtain legal advice is before you sign a binding agreement, and ideally before you sign a heads of agreement, term sheet or anything that commits you or requires a non-refundable deposit. Once you are contractually bound, your options narrow and your negotiating position weakens. Advice taken early, by contrast, allows the transaction to be structured correctly from the outset and gives you the strongest position from which to negotiate.
A lawyer assisting with a business purchase can advise on the structure of the transaction, conduct or coordinate the legal due diligence, and review, advise on and negotiate the sale agreement. That work extends to the lease, the transfer of key contracts, the PPSR position, the treatment of employees, and the warranties, indemnities and restraints that will protect you after completion. It also includes managing the conditions that must be satisfied and the mechanics of completion itself. If you are considering an acquisition, engaging a business purchase lawyer at the outset is what allows the transaction to be assessed and structured properly before you commit to it.
How Long Does It Take to Buy a Business?
Buyers frequently ask how long a purchase takes, and the honest answer is that it depends less on the paperwork than on the approvals the transaction requires. A straightforward acquisition with no lease assignment and no licensing can move from agreement to completion in a matter of weeks. A purchase involving a landlord's consent, a franchisor's approval and a licence application can take several months. Understanding the sequence helps a buyer plan realistically and identify where the delays are likely to arise.
Most transactions follow a recognisable path. The parties reach agreement in principle on price and broad terms, often recorded in a heads of agreement or term sheet. Confidentiality and, where appropriate, exclusivity arrangements are put in place so the buyer can investigate the business properly. Due diligence is then conducted, the sale agreement is negotiated and signed, and the transaction moves into the conditions period before completion occurs.
The conditions period is where most timeframes are won or lost. A contract will commonly be made conditional on matters such as the buyer obtaining finance, the landlord consenting to assignment of the lease, the franchisor approving the incoming franchisee, the buyer securing the necessary licences, or the buyer completing due diligence to its satisfaction. Each condition needs a clear deadline, a clear standard for when it is satisfied, and a clear consequence if it is not. A condition drafted loosely can leave a buyer bound to a transaction it cannot perform, or give a vendor an argument that the buyer has failed to comply.
Two points are worth emphasising for buyers. The first is that a heads of agreement or term sheet can be binding in whole or in part, and signing one believing it to be a mere formality is a common and costly mistake. The second is that the deposit arrangements and the circumstances in which a deposit is refundable should be settled before anything is signed, not discovered later. Both are reasons to obtain advice at the very start of the process rather than once the contract arrives.
How Much Due Diligence Do You Need?
Due diligence should be proportionate to the transaction. A small and straightforward business may call for a focused review of the essentials, while a larger or more complex acquisition can require a far more extensive investigation. The aim is not to apply the same exhaustive checklist to every purchase, but to match the depth of the review to the risk involved.
The appropriate level of due diligence depends on factors such as the purchase price, business structure, number of employees, premises, key contracts, intellectual property, franchise arrangements, regulatory obligations, existing liabilities and overall operational complexity. A sensible review focuses on the areas of greatest value and risk, giving the buyer meaningful protection without incurring unnecessary cost.
How We Can Help
At Whelan Lawyers, we assist buyers throughout the process of acquiring a business, from the first assessment of an opportunity through to completion. Our advice is informed by senior commercial experience, including our Principal’s background as in-house counsel within national businesses, which means we consider a purchase through the lens of a business owner as well as a lawyer.
If you are assessing a business acquisition, we can help with legal due diligence, the sale agreement, commercial contracts, leases, franchise arrangements and the other legal issues that arise during a transaction. To discuss a purchase you are considering, you are welcome to contact our team or to learn more about how we assist buyers on our business purchase lawyer page.
Frequently Asked Questions
Do I need a lawyer to buy a business?
A lawyer is not legally required for every business purchase, but the transaction usually involves binding contracts, significant obligations and real financial risk. Legal advice can identify issues such as unassignable contracts, encumbered assets or an unfavourable lease, and help you negotiate protections before you are committed. For most buyers, early advice is what allows the transaction to be structured safely.
What legal documents should I review before buying a business?
At a minimum, a buyer should review the business sale agreement, the lease for any premises, the key customer and supplier contracts, and the employment arrangements for staff. Where the business is a franchise, the franchise agreement and disclosure documentation must also be reviewed, and where you are buying shares, the company’s corporate records become relevant. Reviewing these documents together gives a complete picture of what you are acquiring.
Should I buy the business assets or the company shares?
There is no universal answer. In an asset purchase you acquire specified assets and rights, while in a share purchase you acquire the company itself along with its existing liabilities and history. The appropriate structure depends on the commercial, legal and tax features of the particular transaction, and the taxation consequences in particular should be considered with your accountant alongside legal advice.
Can I buy a business without taking on its debts?
This depends heavily on how the transaction is structured and on the terms of the sale documents. An asset purchase can allow a buyer to acquire particular assets without assuming the seller’s general liabilities, whereas a share purchase means acquiring the company together with its existing obligations. Even in an asset purchase, some liabilities can follow particular assets, so the position needs to be confirmed by reviewing the specific transaction rather than assumed.
Disclaimer: This article provides general information only and is not legal advice. The law is complex and varies based on individual circumstances. You should seek specific legal advice about your particular situation before making any decisions about legal matters.
Neda Whelan
Neda Whelan is the Founder and Principal of Whelan Lawyers. With over a decade of experience as former General Counsel for major national networks such as Clark Rubber and Jim's Group, she provides practical, commercial-first legal strategies for franchisors and business owners.
