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Business purchase due diligence guide – before you engage a lawyer

Business purchase due diligence guide - before you engage a lawyer

3 January 2020

You’ll likely talk to a business seller about key sale terms before you get a legal opinion or help with formal legal documents for a business purchase.

Below is a guide for items you can discuss with the seller before you engage a lawyer.

First, before you start discussions, consider a non binding disclaimer like the sample below.

Non binding terms

In written negotiations, you can use the words "both parties do not intend for these terms or statements to be legally binding until they have been incorporated into a formal legal document."

Sale terms

Sale terms you can check include:

Inventory

You may check whether the sale will include inventory, the portion of the purchase price that relates to inventory

Intellectual property

You'll want to check which intellectual property will be included, this may include the business name, logo, signage, website and content, and social media accounts and their content.

Seller handover

You can request a handover before the completion date (the day the key changes hands and full payment is made for the business).

Non compete

You’ll want to check the intentions of the seller. Do they intend to work in a similar business close by? You may benefit from having the seller agree to a non compete.

Finances

You’ll want to make sure the business is financially sound.

Now you may of course have an accountant help you with this task and while this is not financial advice, you may request these items from the seller:

3 or 5 years worth of financial records such as a profit and loss, balance sheet and cash flow statement
Budgets, forecasts including sales projections
Reconciliation of the contracts to the financials - i.e. check if you can see the amounts in the contracts have been paid to those parties in the financials.

Contracts

Contracts may include supplier contracts, employee and contractor agreements and possibly a lease.

The contracts will give you an idea of the business's liabilities, stakeholders, future financial commitments and the seller’s compliance with those contract terms and applicable laws e.g. minimum wage requirements.

Can the contracts be transferred or do they need to be re-negotiated and will you get the same deal?

Do you have questions or comments about due diligence tasks for a business purchase? Be sure to leave them below.

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Business Purchase

Transfer duties for a business purchase

Photo by Kelly Sikkema on Unsplash

Transfer duties for a business purchase

Updated: 15 February 2021

When you buy a business, you need to pay transfer duties. Here’s what you need to know.

In a hurry? Jump ahead.

Due date for transfer duties

You’ll need to pay duties to Revenue NSW within 3 months of the date of the contract; don’t confuse this with the settlement date which is usually later.

Assets included

To calculate the transfer duties, Revenue NSW counts:

land and property
interest in land, such as a lease
plant and equipment
shares and units
goods that are not stock-in-trade, under manufacture, or excluded from transfer duty.

Excluded assets

Generally, you will not pay transfer duty on:

goods that are stock-in-trade
manufacturing materials, or anything under manufacture
assets used on land for primary production
livestock
registered vehicles
ships or vessels.

The exception applies to assets that cannot be moved from the property.

No duties payable on these items

From 30 June 2016, you also no longer have to pay transfer duty on:

gaming machines
intellectual property used in NSW
licences or permissions under NSW law or Commonwealth law, if used in NSW, such as a taxi licence or water access licence
the goodwill of a business, if it supplies goods or services in NSW.

You must pay transfer duty on these assets if your agreement is replacing one made before 1 July 2016 for the same business property and assets.

Business structure

Revenue NSW is not concerned whether you have setup your business as a company, partnership or even have any formal organisation. Selling paintings at a market once a week is a considered a business.

Section 26 of the Duties Act

You won’t have to pay duties on dutiable goods if their value is 10% or less than the total value of the dutiable property in that transaction.

If the value of the dutiable goods exceeds 10% of the total, then you’ll need to pay duties.

Example – duties payable

Here’s an example:

lease $15k
goods $85k
stock in trade $50k
goodwill $200k

The dutiable property in this example (from 1 July 2016) is the lease and the goods, i.e. a total of $100k.

In this example, the lease is 15% of the dutiable value of the property being transferred, so ad volorem duty is payable on $100k.

I.e. $15k/(lease $15k + goods $85k) = 15%

Example – duties not payable

lease $1k
goodwill $1k
goods $99k

The dutiable property in this example (from 1 July 2016) includes the lease and goods i.e. a total of $100k.

As the dutiable value of the lease being transferred does not exceed 10% of the dutiable value of all the dutiable property (being $1k / $100k = 1%), you won’t have to pay duties.

Buying land and assets under separate contracts

Transfer duty is calculated as though it’s one transaction when land and business goods are sold under different agreements, but as part of the same arrangement, including:

agreements with an inter-dependency clause
where the parties entered into options before making the final agreements.
the buyers and sellers do not need to be the same parties on each agreement for it to be the same arrangement.

Example – separate contracts

When you buy a business, the assets not liable for transfer duty include:

$25,000 intellectual property
$25,000 stock-in-trade

Liable assets include:

your factory, valued at $500,000
your plant and equipment, valued at $100,000, if they’ve been transferred with the land as part of the business.

You must pay transfer duty on the value of your property, plus the value of your plant and equipment:

Land + liable goods = $500,000 + $100,000 = $600,000
Transfer duty owed = $22,490

In addition to any duty you may owe based on the rules described above, you’ll also need to pay the $10 transfer duties on the items below.

The $10 transfer duty

You may also need to pay a $10 transfer duty for any:

sale of a business agreement
duplicate sale of a business agreement
transfer of lease
transfer in conformity to the agreement.

Got questions or comments about duties ? Be sure to leave them below.

When to switch from a contractor to an employment agreement

Business Purchase, Employment

When to switch a contractor to an employee agreement

Photo by Mimi Thian on Unsplash

When to switch a contractor to an employee agreement

Updated: 7 December 2019

There are differences between employees and contractors. You can read all about those here.

When to use a contractor agreement

The best use scenario for a contractor agreement is project work by a highly skilled worker.

Why?

Typically, contractors are autonomous workers that need little or no direction to perform their work which may be a specific project for which they are hired.

Also, contractors usually hold their own insurance and set their own hours of work.

The contractor test

We’ve taken you through the contractor test before and you can see the entire test as a refresher below.

The text excerpt below is courtesy of the Fair Work Ombudsman.

The tests and the court

The tests are simply indicators. There's no rule that you must meet all of the 9 tests to classify a worker either as an employee or contractor.

Of course, if a case is brought before a court then all the 9 factors will be taken into account and the court will make a definitive decision whether the worker is a contractor or employee.

Now, the best outcome is to prudently classify a worker as an employee if most of the employee tests are satisfied.

You should never let it get to the stage of testing the worker's classification in court because this can be expensive and time consuming.

Sham contracting

If a contractor takes a case like this to court, they'll be claiming that you are sham contracting - calling a worker a contractor to get out of paying employee entitlements like sick leave an annual leave.

When to switch to an employment agreement

If you can see a project will be ongoing, you are directing that worker about how to perform work and setting their work hours, it's likely they should be an employee and not a contractor, so don't risk it.

And, as always, if you’re in doubt, always get advice.

I wish you success in your ventures!

I need help with a worker agreement

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