What you must consider before signing a Business Contract

Buying a business can be an overwhelming event for both the Buyer and the Seller and the opportunity to buy or sell at a price might seem simply too good to pass up. For this reason, many Seller or Buyer seek to jump into a contract too quickly, often without considering the fundamental aspects of the Business.

If issues are discovered after signing, it may lead to a substantial increase in legal fees to negotiate and to amend the contract. In a worse scenario, it may lead to a party being bound to complete a contract at a significant financial disadvantage.

Speaking to a lawyer before signing a business contract is always preferred, especially in Queensland where the agreement is not a REIQ contract. However, there are some key areas in which you should ensure mutual understanding with the other party, before signing a Contract.

  1. Correct Entity Details

This is not always obvious, as either party may be unaware of the actual buying entity to begin with. Both parties will need to be sure that the correct entity is stated in the contract. For instance, is the Seller as owner of the business an individual, a trustee, an estate, a partnership, or a company? The Seller should be clear on the exact entity that owns the business name and assets, as the contract terms require the Seller to warrant that they have the ability to sell the assets.

Speaking to your accountant to ensure all entity details are correct is crucial.

  1. Purchase Price

The Purchase Price is also not as obvious as it appears. If the Buyer and Seller agree about the Purchase Price (and the deposit), consider is the price to be paid at the Completion Date, or in instalments? Does the Purchase Price include the stock, or will that be assessed before completion and be added onto the price? Is there an earn out of pending contracts part of the sale price, meaning if they are not achieved is there an adjustment to the Price? All these issues should be clarified between the parties before the entering the agreement.

  1. Key Dates and obligations leading up to Completion

The obligations between the parties in a Business Contract will differ on a case-to-case basis but can include negotiations on:

  • a Buyer’s finance condition.
  • a Buyer’s requirement to review the books and financial records of the business.
  • a tuition period by the Seller prior to or after completion.
  • due diligence searches to the buyer’s satisfaction of the business and assets.
  • if there is a lease, the terms of the current lease.
  • reviewing the list of business employees and their existing entitlements; and
  • reviewing the list of plant & equipment to be included in the business sale (and what is being excluded).

The parties will need to agree on a reasonable date for confirming each condition, as well as the Completion Date.

  1. Post Completion Obligations

The parties may also agree on further obligations after Completion, including the requirement by the Seller to assist in the Business (usually unpaid, but sometimes as a paid consultant) for a set period. The Seller should ensure that reasonable terms for the assistance (such as a maximum number of hours of assistance per day or week) whether by phone or in person are specified.

The Buyer and the Seller should also agree going into the Contract, the details of a restriction on the Seller after completion of competition, preferably by customers, suppliers, the area from the Business and the period.

These steps should be considered by both parties and discussed before a business contract is prepared or signed. If a contract is already prepared, to ensure that all terms between parties or the terms represented by the Seller or the agent are in included the contract, we recommend that you seek a review of the Contract by a qualified lawyer.

If you would like to speak with us about entering a business contract, please contract Tony or Jake our office on 07 3839 7555 or email us info@perstivelaw.com