Buying, setting up or selling a small business
Establishing yourself as a business owner requires careful planning, including understanding of various legal requirements. The best chance for a new business to succeed is to get the right start with professional guidance from a solicitor.
Starting up a new business can involve purchasing an existing business or franchise, or setting up your own enterprise. While existing businesses and franchises provide immediate cash flow and have infrastructure in place, the purchase can be a complex process which your solicitor can discuss and simplify.
The sale of a business also requires careful planning and consideration to ensure maximisation of the return to the seller and no unforeseen consequences.
Advice from other professionals such as an accountant and financial adviser should also be obtained. Your solicitor will also provide you with guidance.
Your business structure affects your business taxes, liabilities, ownership and profitability.
The four most common structures are:
- sole proprietor (owned and run by an individual)
- partnership (arrangement of people to carry on business in common but not as a separate legal entity)
- company (body corporate which is a separate legal entity from its shareholders)
- trust (holding property for the benefit of one or more persons).
When you are planning to carry on business with another person, it is critical to ensure that there is a clear understanding and agreement with your partner or shareholders on how the business will be managed.
Your solicitor in conjunction with your accountant, can advise you on these issues, including the most suitable structure considering your tax position, personal legal liability and availability of capital.
Buying or selling an existing business
It is important to ensure that you consult with a solicitor before signing a contract. Too often, a seller or buyer will sign what they believe is a ‘standard’ contract but these contracts often fail to adequately protect the rights of the parties.
From a seller’s perspective, matters such as the taxation consequences of the sale; adjustments for liabilities such as employee entitlements and compliance with statutory disclosure obligations that apply to retail businesses need to be considered. Without proper advice prior to contract signing, a seller may end up receiving far less for its business than what it believed it would receive and may remain liable for ongoing business obligations after settlement.
A buyer needs to ensure it conducts full due diligence on the business. This process includes checking business records such as licences, permits and registrations, plans and operations, financials, lease agreements and intellectual property of the business. If you are buying, you should also consider the industry’s landscape, competitors and the dynamics of the marketplace before commencing negotiations.
Your solicitor will study the terms of the contract to ensure they cover what is to be included in the sale and purchase, including:
- the transfer of the business name, premises lease and other key assets, permits and licences
- the price of existing stock and the fixtures and fittings to be included in the sale
- the inclusion of appropriate warranties and representations in respect of the sales performance of the business
- any appropriate security for each party’s performance of their contractual obligations
- ‘goodwill’ (a figure that determines the intangible advantages built up by the business, eg reputation and connections, which differentiate the value of an existing business from a new business) and any clawbacks or retentions in the event all customers do not remain with the business after sale
- a suitable restraint of trade on the vendor to prevent direct competition within reasonable proximity
- any required training or assistance on running the business from the seller
- the transfer of existing employees, retention of key employees and treatment of employee entitlements.
Buying a franchised business means receiving an established brand, product or service that has marketing and operations in place to support you from the beginning. Existing franchised chains operate within pre-set rules regarding the purchase of stock, shop fixtures and fittings and marketing.
It is important to understand that there are initial and ongoing fees associated with acquiring these benefits. Buying a franchised business involves many of the same considerations as buying an existing independent business.
Full due diligence should be conducted on issues such as:
- the reputation of the franchise
- demand for its products
- the franchising fees
- duration of the franchise
- suitability of the premises and any lease
- the operating procedures.
The same considerations apply whether selling a franchised business or an independently operated business. A seller of a franchised business should also ensure it complies with any sale procedure or restrictions contained in the franchise agreement.
Setting up a business
Choosing a recognisable business name and protecting it through a trademark registration is one of the first steps to ensuring your success. Other matters to consider include:
- Business structure and plans including budgets
- Identifying the right location and securing the premises
- Funding options
- The basis for engaging workers in the business.
Leasing versus buying premises
Your business location has a significant impact on business operations. Short-term renting provides flexibility if the business grows quickly, while long-term leases with affordable rent prices can give your business stability.
If you decide to lease, the terms and conditions of the lease can be negotiated. You should obtain legal advice so that the lease document reflects your needs and outlines:
- the way rent increases occur
- the duration of the lease
- the ways in which the lease can be terminated
- the payment responsibilities for repairs, fixtures, fittings
- your share of rates and other outgoings.
If you are planning to customise your location and you desire more security, you should consider buying a premises. Advice should be sought on the appropriate buying entity before signing the contract.
You may also be considering operating a home business. Your solicitor can help you comply with legal requirements. Local council regulations may limit some of your business activities.
Choosing from the myriad of loans on offer means you need to understand your obligations under a loan agreement or personal guarantee. It is advisable to have reserves to give your business enough time to return a profit. A business plan can help you to determine the required funding for start-up, operating and contingent spending. Often solicitors will work with suitable professionals, such as accountants and financial advisers, to provide you with this type of comprehensive business advice.
By law, workers’ compensation insurance is compulsory for employers. You may want to consider insurance against fire, burglary, public liability, personal disability and loss of profits. Any lease agreement you sign will likely prescribe the types of insurance you will need in occupying the business premises. Your solicitor can advise you on the legal requirements and risk, which may vary depending on the type of business and its arrangements.
Operating a business
Many facets of the law come into play while operating a business. Guidance on, and awareness of, these matters before they arise may save your business and possibly your personal assets.
From the start, you should obtain your solicitor’s advice on legal issues arising from:
- director or partner duties and obligations
- employer/employee relations
- debt recovery
- copyright and trade marks
- consumer protection and trade practices
Ask your solicitor about the legal requirements and the associated costs during the process of buying, selling or setting up a business. Early consultation may help you to prevent any issues when you are operating the business or when you have sold it.
Your solicitor can also advise you on state and local government charges, including business name and trademark registration fees, lease registration fees, licensing and permit fees and transfer duty on the purchase of a business.
The information in this brochure is merely a guide. It is not meant to be a detailed explanation of the law and it does not constitute legal advice. Queensland Law Society recommends you see your solicitor about particular legal concerns.