In this video, OMB Solicitors Partner and Accredited Property Law Specialist Simon Bennett talks about the complex nature of buying and selling businesses.
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Things are changing for employers starting July 2022. The minimum wages under the National Minimum Wage and under most awards have increased.
Many people have a desire to start their own business, chasing the dream of independence, control of their own destiny and, hopefully, riches.
But for many the risks associated with launching a new business are too great. This is where running a business as a franchisee is often seen as a viable alternative. By operating within a franchise you can avoid many of the issues which cause start-up businesses to fail, such as establishing a brand name and identity, forming new work practices, training and staffing.
There are also, however, risks and pitfalls involved in becoming a franchisee. Some of these are outlined below but in any event, before embarking on any franchise agreement, you should consult a legal professional with experience in this area to help clarify the best way forward.
What are the advantages of running a franchise?
A franchise arrangement involves a contractual agreement between a franchisor (the owner of the franchising business) and the franchisee – the person given permission to use the business’ name, procedures, business model, branding and marketing for an agreed period of time. Under the agreement the franchisee is given the right to offer, supply and distribute goods and services under conditions set out by the franchisor.
There are a number of advantages to running a business as a franchisee compared with starting a business yourself, including:
- The franchise business will generally have an established reputation and image, proven management and work practices, access to national advertising and ongoing support. It’s often portrayed as running a small business inside a big business network. Poolwerx, Boost Juice and Coffee Club are some examples of successful Australian franchises.
- Training in the set-up and operation of the business will often be part of the agreement with the franchisor.
- Securing finance from a lender may be easier if you’re setting up a franchise as the amount sought will often be less than if you start a business yourself.
What are the risks of taking on a franchise?
While there are some clear upsides to taking on a franchise agreement, there are some equally clear downsides which any prospective franchisee should very carefully consider. Consulting a Gold Coast Business lawyer with franchise experience is highly advisable in light of some of the concerns touched upon below.
Some of the disadvantages include:
- The franchise agreement brings with it restrictions on where you operate, the products you sell and the suppliers you use.
- The agreement will set out some fairly prescriptive terms on how you run the business, from staff uniforms to use of logos and design of a store, so be aware this leaves little room for the ideas and creativity you might bring to a business you personally own.
- Bad performances by other franchisees in the network may affect your franchise’s reputation. This is a genuine and well documented problem that has occurred in some well known ‘chains’.
- The franchise agreement will mean you share profits with the franchisor in an ongoing manner. There are also a number of other ongoing costs to be aware of, which might include franchise renewal fees, advertising and transfer fees, employee and management training fees, and other royalties.
- At the end of the franchise agreement, the franchisor is generally under no obligation to renew the agreement… which can leave your business high and dry.
Set-up fees can also be a significant downside for a franchisee. Depending on factors such as the prominence of the franchisor’s brand and the location of the business, initial fees to set up can start as low as $5000 and go as high as $1 million in Australia. There is the risk, obviously, that this money will never be recouped if the franchise then underperforms.
The points above demonstrate that a process of due diligence before taking on a franchise agreement is strongly advised.
Beyond those risks, franchising arrangements are governed by an industry code of conduct within the Competition and Consumer Act and regulated by the Australian Competition and Consumer Commission, which can be found here. It sets out standards for disclosure, procedures for dispute resolution, good faith obligations, cooling off periods and procedures for ending franchise arrangements. Failing to comply with franchising industry codes could incur up to 300 civil penalty units (approximately $63,000).
In conclusion
It’s common for people who decide to take on a franchise arrangement to be changing careers, or running a business for the first time. This lack of experience makes it even more important to seek the advice and guidance of someone qualified in identifying both the risks and rewards of franchise agreements. Many firms retain experienced franchise lawyers who can help guide you through the process so get in touch today if you’re considering taking on a franchise business.
Contact our Gold Coast Lawyers today for more information.
Before undertaking Buying A Business we take a look at the complicated transactions and how we can help.
In this video, Property Law Partner and Accredited Specialist (Property Law) Simon Bennett gives us insight into the complexities of Buying A Business.
Contact our Business Lawyers Gold Coast team for more information here Property Law Enquiries.
Transcript
Hi there, I’m Simon Bennett, Senior Partner of OMB Solicitors, and I’m going to be talking to you today about buying a business. The importance of buying a business is that it’s a complicated transaction, not necessarily governed by the purchase price or the size of the business you’re buying, more about the type of business and what’s involved in that transaction.
So looking at buying a business, if you are, the first thing you should be thinking about is conducting your own due diligence on the business you’re looking to buy. So, that means looking at the financial sustainability, usually with an accountant or a financial advisor, and this is key.
Then making your own inquiries about the type of business, the customers, the sustainability. I’d recommend looking at both the risks to that business and the possible benefits of that business. Once you’ve bought it, it’s yours.
So you need to understand what might go wrong, and I would also recommend that you look at preparing a business plan for how you’re going to operate that business once the purchase goes through. There’s quite a bit of work to be done up front buy you in checking out the business, and as I said, taking those financials, if you do get them early, to a financial advisor or an accountant to get some financial advice.
Once you get through that stage, it’s really important that you speak to your lawyer about the transaction as a whole. But particularly, the first thing I like to think about is what entity are we going to buy the business in? It’s really unusual that you would go about buying a business in your individual name.
It’s most common that you would purchase a business through a company or a combination of a company and a trust of some description, be a unit trust or discretionary trust. Now, I think it’s essential that you make these decisions on advice from both your accountant and your lawyer, and they should be working in conjunction.
The reason for that is accountants tend to look at a certain aspect of the transaction, and lawyers will tend to look at another aspect. But in conjunction, it’s really important that they communicate to work out the best method and the best entity for you to use when buying a business.
So let’s say we’ve got the due diligence done and you’ve decided you want to go ahead with this purchase and you’ve set up the entity, it’s now time to go to contract, and unlike buying a very simple residential property, the contract really should be prepared by a qualified and experienced lawyer.
There’s quite often a number of detailed special conditions that are going to need to be added to contracts of sale for the purchase and sale of a business, and these are fundamental to protecting you as a buyer in the process from contract to settlement.
We’re going to look at things like making a contract subject to finance, verification of the final books and records that they give you through your accountant. It may include copyright or IP material that has to be transferred, it may include a transfer of licences.
Most importantly and regularly, it involves the transfer of a lease or an assignment of a lease or a grant of a new lease. Now, if the premises where the business is situated is key to the business, we have to make the contract subject to you gaining tenancy or tenure of that premises, and this involves an assignment of the existing lease or negotiating terms of a new lease.
There’s quite a bit involved legally around checking out the terms of that tenancy and making sure that the lease is satisfactory, knowing the rental increases, making sure the uses are appropriate, etc. So, drafting clauses around all of those things are really important.
Another issue which is really important with businesses is staff. The contract needs to provide details about what’s going to happen with staff. Are you, as the purchaser, going to take on staff? Are you going to select certain staff? Are there certain key staff that you have to have? And if you don’t get those staff, then the sale or the purchase isn’t to go through.
So, good communication around those elements and conditions is really important, and drafting those clauses appropriate to what you need is similarly really important.
Once we get to that stage where a contract has been finalised, the parties agree and it’s signed, it’s really on to the lawyer then to start conducting appropriate searches, and depending on the type of business, the lawyer and in conjunction with the accountant and the buyer will determine what searches they think are appropriate and make those checks to make sure really that when you get to settlement, that you are buying the assets and the benefits of the business that you think you’re getting without the liabilities.
We don’t want to be taking over liabilities of the business that you don’t want. Once we get through those searches, we get to the next stage, which is settlement, and at settlement, we obviously purchase the business, we hand over the money and we gain title to either chattels, assets, the business, goodwill, licences, tenure of the property, etc, and that’s a really important stage.
Obviously, but it doesn’t stop there, quite often after settlement, there’s a number of things that your lawyer will still attend to, it could be finalising the registration of, say, a transfer of the business name, lodging forms with relevant departments, etc.
Then on completion of this, hopefully, we’ve got you in a position where you’ve got the business of your dreams and you can make a success of it, and it’s all that you hoped it would have been.
Buying or selling a business can be a stressful time. Your business is often your dream and the motivation and income source for your family.
But the process of buying or selling a business can be difficult and requires expert assistance.
Step One
Investigate the business that you are thinking of buying. Do your due diligence.
Step Two
Seek expert legal advice to draw up the contract. This is a critical stage as the contract will set out the essential terms of the purchase and sale. Is the contract subject to finance, verification by your accountant of the financial records or the assignment of the lease of the premises? Are there licences or approvals that are required to run the business, will there be a restraint on the seller or its entities conducting a similar business for a time in a certain area? Are there staff required to remain in the business and on what basis will they be offered employment? This is vital and your legal representative should be able to draft a contract that protects you and ensures that you will only be buying a business on the terms that suit you. Drafting these conditions is an important task and the detail is often critical.
Step Three
Once the contract is negotiated and signed it is time to satisfy those conditions, get your finance, check the financials and obtain the landlords consent to assign the lease or grant a fresh one. Again the documentation here is vital and it is important that you and your lawyer communicate clearly.
Step Four
So the conditions have been approved and it is time for settlement. Your lawyer will have conducted the necessary searches and from these it will be clear what adjustments need to be made at settlement. Documents need to be checked and liaising with your bank regarding finance. Settlement will need to be coordinated with the seller and their financier, the landlord, and the buyer’s financier so that all parties are satisfied to proceed. It is essential for all parties that these matters follow the correct procedure as the buyer wants to ensure they take over the business with all items in place to continue its operation without any impediments or debts. The seller needs to be sure that upon the completion they receive their money for the sale and have been released from all liabilities, including personal guarantees of the business moving forward.
Step Five
Once settlement has been effected your lawyer should attend to any loose ends which require attending to including lodgement of forms, registration of transfers, releases or any other items to perfect the completion and transfer ownership to the buyer and away from the seller.
Whilst the exact process varies from transaction to transaction the skill and knowledge of your legal expert should be relied upon to ensure the transaction proceeds.
Business Lawyers Gold Coast At OMB Solicitors our expert Gold Coast Lawyer team can ensure that your purchase or sale is handled in the most professional and competent manner with a common-sense approach to the transaction having regard to an understanding to your business needs
If you’re a business and you’re owed money and have received a court judgement to recover the debt, what are the next steps? In this podcast, Cameron Marshall, Business Lawyer Gold Coast of OMB Solicitors sets out the ways your business can recover the debt.
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Dan: Cameron, where does a business start to recover this debt?
Cameron: Yes well that’s a good question. The first place to start is if we’re dealing with the civil courts in Queensland, the uniform civil procedure rules as they’re usually the best place to start. Now I’ll just talk about an individual today, but these can also apply to some, in some cases, corporations. So the first thing you’d be looking at is to enforce the judgement, which you would have, in the courts in the uniform civil procedure. So that’s after the judgment’s been given, and you make an application to the court.
Cameron: Usually the first step is what they call an enforcement hearing. Now that’s really a process just to ascertain what the debtor might has to do to pay your debt. So that’s a very important thing to start off with. So you can show up and you know which actual tool that you wish to use to be able to get your money back.
Dan: So Cameron is the fact that the the court judgment’s been done and dusted, is that sort of half the battle won?
Cameron: Oh definitely, that’s in some cases the easy part. We have a famous saying, you can’t get blood out of stone, but people don’t like paying money and a lot of the time you’ve got to drag them to make them pay, and the way to do that is through the recovery process. So yes.
Dan: Right okay so the person’s got the court judgement . Now practically what is the next step? So are they sending out a letter to the person who owes them the money or what happens?
Cameron: So we’ll just look at the Uniform Civil Procedure Rules procedures at this stage. So what the first thing you would do is what they call a Form 71, which is a statement of financial affairs or financial position, and you send that out to your debtor. Hopefully if they’re a good and honest debtor they’ll fill it out to the best of their ability and swear what assets they have. If they do that you can then take the next step of deciding how to enforce it if they don’t pay.
Cameron: But if they don’t return that you then make an application to the court. It’s fairly straightforward, however you need to know what you’re doing, and I’d of course advise you see a solicitor to do it.
Cameron: Now what that effectively does is allow you to decide the best way and the best angle to get try and get your money back. If they don’t turn up, you can apply to the court and have an enforcement warrant issued. Now I’ve done that a few times unfortunately, where the enforcement warrant’s issued, and in those unfortunate cases the police actually go and drag the debtor back before the court, so they’re required to answer the questions that you require of them. So it is a tool that’s used often, and it is useful because it allows you to identify what money that there is.
Cameron: Now once you’ve got that and you know what their financial position, you can go to the next step and try and enforce the debt. Now if they’ve got personal property or real property, which is land, you can get what they call an enforcement warrant in seizure and sale. And that will allow the bailiff to attend the property and obtain certain items, depending on what they are. There are some excluded items under the Bankruptcy Act. And he can sell them and you can get the money through that.
Cameron: Another good way is garnishing wages if the person is an income owner, PAYG earner, you can make application to the court to have their wages each week garnished and they can pay you. There’s also another useful one which I use quite often, is unfortunately I get the bank details and if they’ve got sufficient money in the bank that you can redirect the debt from the bank straight to you. But the one thing with those orders as well as the garnishing orders, you need to do attend to the enforcement hearings so you are not unfairly or harshly treating the debtor, so you’re not putting him or her into a point of destitution. So that’s one of the things that the court will need you to satisfy.
Dan: Now Cameron, you’ve got the judgement , is there like a certain timeframe that you need to recover the debt?
Cameron: Yes it does expire. It technically expires after six years but my advice is as soon as you’ve got that judgement you need to act on it sooner than later. The longer you leave it the less chance you’re ever gonna get paid. If it goes beyond the six years you have to ask the court and show the court why you didn’t enforce it previously. So yeah.
Dan: And what about legal costs to do so? So for example if somebody is owed a debt they’ve got the judgement and now they’ve taken heed of what you’ve said about getting some legal advice and help with this. Is there any chance that they can recover some of the legal costs on top of that debt?
Cameron: Yes it’s fairly procedural. As opposed to the legal steps that are required to get a judgement of going to trial et cetera which are very technical, the steps of enforcing a judgement are often more procedural. Now the court scales do allow you to add those costs into the recoverable amount that you’ll be seeking to be paid. And because they’re more procedural in nature then they generally are closer to the actual scale cost, the cost that you pay, and you can be paid them as well. They increase the debt that’s owed to you and is of course recoverable. You’re also allowed interest as well, that continues to be applicable under the various legislation.
Dan: You’d have to have rocks in your head not to seek legal help and representation in this respect, given that you’re gonna recover the costs anyway.
Cameron: Yes 100% because they can be very particular. A lot of the time they’ll require what they call personal service, a lot of these documents, and the courts are very stringent in the procedural application of it. So unfortunately if you make a little mistake in one of the forms or something like that which looks fairly insignificant, the magistrates or the registrars can sometimes or often refuse to allow you to take the next step, because the step … what you’re asking the court to do is basically sell someone’s assets and they take that very seriously. So you should get legal advice, yes.
Dan: Cameron, thanks for joining me.
Cameron: No worries, thank you.
Introduction
In family law property settlement proceedings all assets and liabilities of each party, (whether they are owned jointly or separately) are combined to form what is commonly known as the “matrimonial property pool.” This pool of assets and liabilities is then subject to scrutinization and possible division by the Court upon separation.
A business interest, owned either separately or jointly, and whether in a partnership, sole trader, company or trust structure, can be treated by the court as “property” as defined in the Family Law Act 1975 (Clth) (“the Act”) and will fall into this asset pool. Each spouse’s business interests will need to be valued (if a value is not agreed to).
In the case of a small business operated as sole trader or a partnership between the spouses, it is generally the assets of that business that largely determine its value. If the business has little by way of assets, and generates income though one or both spouse’s efforts, skills or trade (e.g. a plumbing business), its value may be very little (nominal). Other businesses may have a corporate and/or trust structure, extensive assets and goodwill, and each spouse’s interest in that business will need to be valued. This may involve a valuation of the entire business enterprise, with the value of the share owned by the spouse (or spouses) then calculated.
If one spouse wishes to retain their interest in any business, they should be aware that the value of that interest will be attributed to that spouse’s portion of the overall split and will give them a financial resource to offset future needs.
Financial Disclosure
Each spouse has an ongoing obligation to give full and frank financial disclosure of all documents relevant to the valuing of any business interest. This includes business records, financial statements, bank records, BAS and tax documentation
Different Types of Business Structures
Sole Trader
A sole trader (like a tradesperson or professional consultant) is a “personal exertion” style of business, with few employees, if any.
Generally, the Court would order (and it is common sense) that the spouse who runs this business will retain the business, as he or she has the necessary skills and training to continue with the business.
A value needs to be attributed to the business, because it is an asset that the sole trader is keeping. Because a sole trading business generally just relies on the personal reputation and skills of a sole trader, a modest value is normally applied to such a business interest.
However, if there are multiple employees and the business has goodwill such that it may be sold as a going concern, then the value of business will be determined by the usual valuation processes by a business valuer, and full disclosure of the books and records of the business will need to be made.
It is also possible that in addition to being an asset retained by that spouse, the court may take the business into account as a future financial resource of the spouse retaining the business.
Partnerships
Partnership businesses may be constituted by both spouses in partnership with each other, or partnerships with a third party or parties.
Spouses in Partnership
When spouses are in partnership, they are normally running a “personal exertion” style of business. If one spouse wishes to retain the business, a value will be determined for the business, like valuing a sole trader business.
However, if the business has employees and goodwill and has been operating for several years, it will need to be formally valued by a business valuer.
For one partner to buy the other out of the business, the partnership will be dissolved and (often in exchange for paying to the other spouse half the value of the business), the continuing spouse will be operating the business as a sole trader.
Partnership with Others
Where the partnership involves third parties, the other business partners will be impacted by separation. The partner who has separated will be going through a tough time and may lose focus on the business. Third parties are also very uncomfortable with the obligation on the spouse partner to make full and frank disclosure of the business, its assets and its dealings.
There will usually be a written partnership agreement, which will generally say what is to occur if one partner was to leave the partnership, if one partner wants to sell his or her interest to the other partners, and what is required to bring the partnership to an end. Separation of a partner may trigger a buy/sell arrangement between the partners. These clauses will generally have been drafted to preserve the business and maintain its value.
If you are not separated and you are in a partnership with your spouse or third parties, I strongly recommend that you contact us with instructions to prepare a partnership agreement (if you do not already have a professionally prepared agreement), so there is certainly as to what will happen to the business if one or more of the parties go through a separation.
Company Owned Businesses
Where a company owns and operates a business, and that company is a “family company”, with the spouses being the only shareholders and office holders, then the Court will generally deal with the business as a type of partnership between the spouses. The business will need to be valued, and it will either be sold, or the party with the requisite skills to keep the business running may buy out the other party, and a share transfer between the spouses will be effected.
However, if the company has third party shareholders as well, it will again be necessary to determine the value of the shares in the company, by valuing the business and any other assets of the company. The value of each parties share in the company will then be determined by the Court, considering the company’s share structure to see if there is an equal or an unequal shareholding, and what rights and benefits attach to different classes of shares.
During the valuation process, director’s loan accounts will need to be considered, and whether the loan is in credit or debit. Repayment arrangements for these director’s loans will generally be made or suggested in the valuation process.
If one party has a majority of the shares in the company, that may affect the way the company is operated and valued.
If the separating spouse shareholder has a minority shareholding with a third party, then the value of the minority shareholding may be given a lesser value as the minority shareholder is unable to make determinations about the operations and the future of the company.
If the separating spouse shareholder has a majority shareholding with a third party, then that spouse will be able to exert a majority influence and control the operations of the business.
Any shareholders agreement entered between the shareholders will also be carefully securitized. Shareholding Agreements may include method to determine value and trigger events (such as separation from a spouse), leading to the implementation of a buy/sell arrangement.
Again, if you are reading this and you are not separated and have shares in a company with your spouse and/or third parties, I strongly recommend that you contact us with instructions to prepare a Shareholders Agreement, to give certainly as to what will happen to the company and business in the event of one or more of the parties going through a separation.
The company constitution may also be relevant.
Discretionary Trusts and Unit Trusts
“Who is in control” is the most important aspect of a Trust Structure.
In a discretionary trust, which includes what is commonly known as a family trust, the Court will consider the trust deeds, the identity of the appointor of the trust, and the history of use of the trust. The Appointer has the power to replace the Trustee, so the Appointer is the “Controller” of the Trust. If the Appointer is a spouse, then it is likely that the Court will treat the Trust as “matrimonial property” rather than a financial resource.
Family Discretionary Trusts are usually set up to hold a family’s assets or to conduct a family business. The Trustee of the Trust will own the assets and operate the business on trust for the beneficiaries.
The beneficiaries of discretionary trusts are usually immediate and extended family members, other family companies and charities. In a discretionary trust, beneficiaries have no interest in the trust property unless the trustee exercises its discretion to distribute to them.
The trust deed will need to be examined to determine how the Trust can be varied to remove a beneficiary spouse who will no longer be involved in the business due to separation. Generally, one spouse will take over the business, which will require a Deed of Amendment to be prepared and executed to remove the spouse as beneficiary, and possibly also to provide for a share transfer by that spouse of any shares owned in the Trustee (if the Trustee is a company).
If the trust is a unit trust, it may be treated with the same principles that apply to a company. The units in the Trust will be valued, and the trust deed examined to see if units can be transferred between unitholders. The trust deed (and any unitholders deed) must be examined carefully as to the duties, powers and obligations on the Unit Holders. The financial records of the business must also be considered.
So, what will happen to your business on separation?
Where both spouses have worked in the business and then go through a separation, this will have obvious and significant repercussions and likely impacts on business continuity and profitability. It may also affect the staff.
In most situations, one of the separating spouses will seek to retain the business free of the other spouse. If that agreement is reached, then orders will be drafted to make that happen according to the type of business structure. The transfer of interest in the business from one souse to another may also be accompanied by payment to the exiting spouse of a “settlement sum” which will often be the value of the exiting spouses share in the business. Otherwise the business will be an asset that one spouse is keeping, so its value will need to be considered in determining a just and equitable division of all assets between the parties.
Whilst it is quite uncommon for a business to continue to be operated by two spouses who have separated, it sometime does happen, generally for an agreed number of years, after which the spouses will meet to decide its future or sale and the division of sale proceeds. Whilst a Court would not make that order (the Court makes a “once and for all” property settlement so that all financial ties are broken), the spouses could agree to implement such an agreement in a Financial Agreement made under the Act.
If neither party wished to retain the business then the business (or their shares in the business) will need to be sold, and the sale proceeds divided in a just and equitable manner. Appropriate orders will be prepared by your solicitor for the sale or transfer of shares, according to the type of structure that operates the business.
As the spouse who retains the business will also have a continuing financial resource at their disposal, the court will take this into account when considering the “future needs” of the spouses before adjusting property between them.
Contact Us
Please contact our Gold Coast lawyer Gary Mallett for any further information on what will happen to your business upon separation, and for legal assistance with
- Property settlement negotiations and mediations;
- Commencing property settlement proceedings in Court;
- Drafting the necessary orders to deal with your business as you have agreed;
- Prepare a Shareholders Agreement (for a company or unit trust); or
- Any other legal advice on separation?
If you’re a tradesman contemplating going out on your own, there’s probably a bunch of things going on in your mind, one which may be how do you legally set up your business?
Integral to that question is what business structure you should consider. Should it be a company, a partnership or a sole trader? Well, to find out more, Elisha Quigg, a lawyer at OMB Solicitors discusses the topic.
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TRANSCRIPT
Dan: Elisha, where does a tradesman start in their thinking about this structure?
Elisha: That’s a good question. Really, before you even start thinking about what business structure might be right for me, I think it’s important that you think about what are the traits of my business and what do I want to achieve in the next 5, 10, 15 years? Are you looking at employing more people? Are you looking at expanding the business quite rapidly? What is the size of your business and I guess what are similar businesses in the industry doing themselves?
Elisha: I think those sorts of questions you need to ask yourself just before you even think about the type of business structure because, really, there are a lot of options. It will come down to what is most suitable to your personal circumstances, whether that be reducing your tax is important to you, or if you’re looking at limiting liability. Those are the sorts of things that you need to start thinking about before implementing any business structure.
Dan: I’m assuming that most tradesmen would be thinking that, okay, sole trader is probably the easiest because it might not incur as much cost as perhaps setting up a company, etc. Is that your experience?
Elisha: Yes, definitely. It certainly is one of the most popular options amongst the tradies, especially those at the subcontractor level with not many staff.
Elisha: But as a sole trader, you are the business, so you have control of everything, which makes up that business. It’s quite quick and easy to set up, there’s not a lot of ongoing accounting obligations, as opposed to some of the other business structures. So, yes, certainly it is quite a popular option amongst the tradies.
Elisha: But, like all types of business structures, there are some advantages and disadvantages. I think that’s what each individual needs to weigh up in their own circumstances.
Dan: For a sole trader, what would be some of those risks? I’m thinking that are they protected should the business go bad, and they’ve got people that want to chase them for money?
Elisha: Yes.
Dan: Are they protected in that case?
Elisha: Well, certainly the other sort of business structures, such as a company, would provide a higher level of asset protection.
Elisha: As a sole trader, one of the key risks is that you are the business, so any loans, credit facilities, supply guarantees, and any other debts or liabilities that you incur in running that business could potentially and generally does become the personal responsibility of the individual sole trader. Really, if things start going pear shape, then you don’t have that extra level of asset protection that something like a company structure would provide, so there are risks.
Elisha: I think it’s important that, depending on the amount of staff that you have involved or the level of risk put in your individual business, I think that’s something that you have to weigh up in terms of whether or not to stay in the sole trader position, which is the most common, or if they want to transition to it something a little bit more sophisticated, like a company or a partnership or a trust sort of business structure.
Dan: Elisha, it probably makes sense for a tradie prior to making a move to get advice. Because I was just was thinking that whilst it’s okay for us to have a discussion around this, and we’ve got reasonable knowledge about what the structures are and the risks and opportunities, does it make sense to consider all those options in consultation with an OMB Gold Coast solicitors?
Elisha: Yes, certainly. I also think seeking advice not only from your lawyer, but also an accountant would be appropriate as well. I think in consultation with all parties involved and having considered what you want to achieve with your business longterm, I think having a roundtable discussion will really seek to achieve great things for your individual business in terms of asset protection, even tax savings, and also just the general progression of your business, particularly if you want to expand with your business.
Elisha: This is certainly the case if you start talking about some of the other business structures like partnerships and companies and the like, and even trust, you certainly would want to be seeking legal advice quite early on, particularly when you start coming to drafting a trustee or shareholders agreements or partnership agreements.
Elisha: Those sorts of things might be quite foreign to a tradesman; however, that’s where our level of expertise can come in and really assist the business in achieving what they want to do.
Dan: Elisha, thanks for joining me.
Elisha: Not a problem. Thank you.
For many business owners, they’ve dedicated years and years of blood, sweat, and tears into their enterprise, hoping that one day, all their efforts will pay off when they sell the business. This, of course, is particularly the case for business owners who, perhaps, haven’t paid into a superannuation fund, who see the sale of the business as going towards funding their retirement. But, of course, when it comes to selling the business, there is a lot to it, and many smart people would say that your planning needs to start years before you hand over the keys.
In this podcast, OMB Solicitors Partner, Simon Bennett discusses the key things you need to consider for selling your business.
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Transcript:
Dan: Well, today, I’m with Simon Bennett, a partner at OMB Solicitors. Simon, what is the starting point for a business owner contemplating all this?
Simon: I think, Dan, it comes down to organisation. A business owner who has put, as you said, years of effort and time into developing and growing their business, would like to maximise not only the price that they’re going to receive for the business, but the efficiency and speed with which that business will sell. Now, quite often, that process can be complicated by a seller not being organised. And what I mean by that is be organised in respect to all aspects that a buyer might want to look at. Any prudent buyer of a business will want to conduct a due diligence and those things will start with the information that I’m gonna talk about.
So some of the key items are your finances. You’ve got to have your books in order. You need to see a qualified and experienced accountant to make sure that your books and your financials are in order. Because no one’s going to buy a business and no one’s going to pay good money or top dollar for a business that can’t justify that purchase price or sale price with the returns. And a really prudent buyer will investigate those figures to determine the strengths and weaknesses of the business. So that’s the key number one. If they can’t finance the business through the figures, they won’t purchase it.
The second thing I’d say you need to look at is all the other bits. The ancillaries. So things like what licences do you need to run the business. If it’s a restaurant, have you got food licences in place? Is the business name in place? If those things aren’t in place necessary to run the business, you will fall foul of the purchaser, and potentially lose yourself the sale.
Then there are things like a business name. Are you operating under a business name? Is it registered and is it current? Because if someone is gonna buy value in a business, and that value includes the goodwill, which would include the name that the business is operating under, we want to make sure that that is current and up to date, and you’ve got the rights to it, not someone else.
We want to look at the equipment list. What do I get? A purchaser wants to know what does the purchase price include? Does it include stock? Does it include equipment? And with that equipment, is it owned outright, that is unencumbered? Is it leased? And if so, what are the terms? Or is it under a rental or some other form of agreement? And if so, again, what are the terms? Can they be assigned, or will a buyer take them over, or will you pay them out as part of the sale process?
So these are key elements that a seller can start to plan well prior to listing their business for sale.
Dan: Not to mention, Simon, even employees, as well. I’m assuming that there might be employment contracts that also need to be considered in the mix.
Simon: Yes, exactly. What’s going to happen? Are there key employees that must stay with the business? So if you put your shoes in the buyer’s position, if I’m buying a business, do I need that key employee, that key staff member business manager or what have you, to come over to enhance the goodwill of the business? If so, as a seller, I’d want to lock that employee in and make sure that I would be able to transfer them across to a new business owner and purchaser.
But it also leads into something else. Are they prepared, if the buyer wants them to, to stay in the business for a period? What would be the terms of that? Would it be documented? And if not, one of the key considerations for a purchaser, so therefore, the seller organising and thinking ahead will say, “Am I prepared to sign a restraint? So if I sell this business, am I then prepared to be restrained from competing against that business?” For example, again, in the food industry, if we were to own a restaurant, surely a purchaser will not allow us to compete within a certain area or radius because then we can erode their goodwill. So upfront consideration of these type of items is key to knowing what terms you’re gonna be listing your business on.
Dan: Simon, is it the case that for a person considering selling their business, that should happen, all the thinking should actually happen two years prior, three years, or five years? Is there any sort of recommended timeframe to do this work?
Simon: I think two or three years prior is too long. I think realistically, in the year you’re selling the business would be adequate. However, when you build your business, you should have consideration as to what will be valuable, not only in the continued operation but also valuable to a purchaser, and that might start a little bit further out. So the way you create and the way you grow your business should have some consideration as to what a reasonable purchaser for the value would pay for that. But I think in preparing for an actual sale, we’d want to be talking about the particular year that you were going to be selling it in, maybe a little bit earlier if you are really organised. But certainly, for something like your books, that should be a constant and an ongoing.
Dan: And getting legal advice as early as possible is obviously a no-brainer.
Simon: Well, I think it is essential. It is really so important. You wouldn’t certainly sign any documents associated with a business sale or purchase without consulting with an expert, someone who has substantial legal experience in these matters because the devil is in the detail, as with a lot of legal documents. The business contracts are no different, and they need to be specifically tailored to each business, each individual seller, and what that business entails. Without that, you can’t use any generic form of document because they’ve just got to be tailored to that specific business. What the buyer and seller have agreed between themselves regarding some of those items I’ve talked about. Really important. Get good legal advice to draught the document. So quite different to let’s say a residential or a basic property deal whereby agents in Queensland are commonly drafting documents. That would not be the case in businesses. You need to see your Gold Coast Lawyers before documents are drafted to do the drafting for you.
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Check before you become the boss and sign the cheques.
So you want to be the boss and control your destiny? Owning your own business is not a simple task and with regulation and rules on top of the difficult financial climate you must be sure that all your ducks are in a row.
From a legal aspect you need to ensure that before you enter into a contract to purchase a business that you consult your Gold Coast Business solicitor. Before you even get to a contract there are extremely important issues of structuring that must be considered. Don’t for a moment think you should just be buying in your own name, serious consideration should be had to owning the business in a company, trust or combination of these vehicles. This type of structuring when done correctly will provide asset protection and may also allow your accountant more flexibility when planning your taxation matters.
The contract must be properly drafted to ensure that you are protected as this is the single most important stage of the purchase. A sensible business contract should allow you the opportunity to investigate all aspects of the business before you are committed to buy. You need to make sure the accounts of the business are accurate and you should ensure your accountant verifies the figures. A trial period can be negotiated where you work in the business and get to see not only the workings but also the customers and the income.
It is essential that the premises from which the business operates is secure as often there is a large amount of the goodwill attached to the position of the business. Therefore your solicitor must check the lease and ensure you have security of tenure. All licences and approvals must also be in place to guarantee that you will be able to operate the business. Issues with staff, ownership and transfer of assets, business names, websites and the like form an integral part of the process. Franchises are often part of business purchases these days and it is essential that you are properly advised on these agreements.
Your solicitor will be able to guide you through the process and you will soon learn being The Boss simply means that you have responsibility for not only yourself but the whole business. Simon Bennett is a Partner and Accredited Property Law Specialist with O’Keefe Mahoney Bennett Solicitors.
This article was featured in Label Magazine – Summer, December 2008, by Simon Bennett