Buying a small business
If you’re thinking of buying a small business, we can advise, support and guide you through the process from start to finish.
Before you buy
If you are considering buying a small business, there’s a legal process after you shake hands.
It’s prudent to apply for your business loan as soon as possible.
Once you have located a business you want to buy, you should contact professionals such as a financial advisor, valuer, accountant and solicitor to help you decide if the business would be a good investment.
The seller usually instructs their solicitor to draft and send your solicitor the contract for sale. Your solicitor and/or accountant can advise you in regards to:
- the contract for sale of business;
- licensing or qualification requirements for your industry;
- the type of entity to operate your business (e.g. sole trader, incorporated company, trust).
- the key elements being purchased, and whether it’s necessary to purchase the business. For taxation or other financial reasons, rather than purchasing the whole business, it may be preferable to only:
- buy the equipment used in the business, or
- obtain a licence to operate the business, or
- buy the company that operates the business.
All of these options will result in you operating a business but each has different legal implications.
Contract advice and negotiation
We closely examine and advise you in regards to the terms of the contract for sale of business. We will negotiate amendments in accordance with your instructions to better suit your requirements. This process involves the consideration of aspects of the purchase including:
- Ensuring that the appropriate and complete equipment is listed as inclusions in the contract and that the description in the contract matches the equipment;
- Ascertaining whether any equipment is subject to hire purchase arrangements, a finance charge, or a mortgage to ensure clear title on settlement;
- Any training period to be provided;
- Treatment of debts, creditors, unbilled fees, and work in progress up to the point of sale;
- Whether a lease is to be assigned;
- Whether you are re-employing existing employees; and
- Whether registered intellectual property is to be transferred to you.
Between exchange and completion
On agreement being reached on the terms of the contract, it is signed and contracts are exchanged by the solicitors, making the agreement legally binding.
The agreement will specify the role of the parties between exchange and settlement (when you pay the balance of the purchase price). During this period, tasks you may have to undertake include:
- Finalising loan documentation;
- Entering into employment contracts;
- Obtaining necessary insurances (e.g. public liability, worker’s compensation, plate glass);
- Obtaining any bank guarantees required by the lease;
- Obtaining any required licenses or approvals;
- Notifying suppliers/clients of new ownership, ABN, and bank details.
The next step
If you’re considering taking over an existing lease, exercising an option on a lease or commencing a new lease, we can advise, support and guide you through the process from start to finish.
What is a lease?
A lease is a legal agreement between a landlord (‘lessor’) and tenant (‘lessee’) for use of the landlord’s business premises.
When does it commence?
A lease generally commences when both parties have signed it, after which neither party can end it without the other’s consent.
However, an unsigned lease is valid if the tenant takes possession of the premises or begins to pay rent.
It is good business practice not to pay rent or open for business until you have signed the lease.
What should be included?
A lease should include:
- the start and end date;
- a description of the premises;
- how much the rent is;
- by how much the rent can be changed;
- the type of business;
- outgoings the tenant must pay;
- required bond, security or guarantee;
- who repairs and maintains the property and equipment;
- core trading hours (when the premises must be open for business).
What is the lease period?
The lease period is the length of time the tenant rents the premises. It may include an option to renew or extend the period.
What is the Retail Leases Act?
Schedule 1 of the Retail Leases Act 1994 (NSW) lists the types of businesses to which it applies.
What is Permitted Use?
“Permitted use” is the type of business you can run from the premises.
Before signing the lease, check that the council permits the premises to be used for the type of business you intend to run. If your intended use is not permitted, you must seek the landlord’s and the council’s consent.
Do not rely on verbal assurances that your intended use of the premises is permitted. Check with the council.
The description of the permitted use of the premises in the lease and in the landlord’s disclosure statement should be broad enough to allow you to expand and sell the business.
What is a Shopping Centre Lease?
The Act defines a ‘shopping centre’ as a cluster of shops:
- owned by the same person where at least five shops are used as a retail business; and
- regarded or promoted as a centre, mall, court or arcade.
You may be required to contribute towards the cost of advertising and promoting the shopping centre
What are some costs of Leasing?
The landlord pays for preparation of the lease unless you ask for changes after returning the tenant’s disclosure statement to the landlord.
You pay transfer duty on and registration fees for the lease. A lease with a period of over three years (including an option) must be registered.
You will most likely have to pay for the installation of fixtures and fittings (‘the fitout’). Shopping centres usually specify standards of construction for fitouts.
The landlord’s disclosure statement will state if you are responsible for the landlord’s costs of preparing the shop for the fitout (called ‘landlord’s works’).
- know what expenses you will incur in preparing the shop to trade;
- follow the fitout standard specified by the lease;
- check whether the landlord has nominated you as the principal contractor for fitout works; and
- familiarise yourself with your occupational health and safety responsibilities.
Payment of Rent
Rent is one of your biggest ongoing costs and is normally paid monthly in advance.
If the lease says you will keep actively trading in the lease period, during that period you:
- can not close the business;
- must use the premises only for the permitted use; and
- must pay the rent regardless of any financial problems.
If you do not pay the rent on time, the landlord may lock you out or end the lease without notice.
Changing the Rent
The lease states when and how rent can be changed.
Outgoings are the landlord’s expenses that you agree to pay under the lease.
The landlord may ask you for security when negotiating the lease, which may be:
- a cash bond; or
- a third party guarantee (a third party pays the landlord if you break the lease); or
- a bank guarantee (your bank pays the landlord up to an agreed amount if you break the lease). The bank is likely to require you to pay them security to obtain a bank guarantee.
If you agree to pay the landlord a cash bond as security, the landlord must deposit the bond with the NSW Government’s Retail Bond Scheme, which holds it in trust.
What are Landlord's intended works?
Before you sign the lease, the landlord must tell you in writing whether they intend to do any works that may disrupt your business.
What is a disclosure statement?
You and the landlord must give each other a disclosure statement using a specific form.
We check the landlord’s disclosure statement for:
- the annual sales of the centre;
- the turnover for specialty shops of your kind per square metre;
- the centre traffic count;
- fitout details;
- construction standards; and
- when the leases for major tenants end.
We check that it includes:
- all the agreements reached during negotiation; and
- any promises made by the landlord
and where necessary we request a new disclosure statement.
The tenant’s disclosure statement must say if:
- you have received the landlord’s disclosure statement;
- you have a draft lease;
- you have had professional advice about your lease obligations;
- you can meet your obligations; and
- the landlord has made any other agreements or representations to you and if so their details.
The tenant’s disclosure statement should note all the verbal commitments the landlord or their agent made to you. We will write in the tenant’s disclosure statement all verbal commitments you tell us the landlord has made to you about the premises, such as:
- the level of passing trade;
- the tenancy mix;
- any works they expect to do that may disrupt your business; and
- your right to be the only retailer selling particular products or services.
We ensure that:
- you receive a landlord’s disclosure statement at least seven days before you begin a new lease;
- the tenant’s disclosure statement is provided to the landlord within seven days after you have received the landlord’s disclosure statement.
If you plan to enter into or assign a retail lease for premises such as a shop, for a reasonable fixed fee for professional costs we will advise and represent you and deal with the landlord on your behalf. This includes:
- checking whether the type and size of the shop require that the lease complies with the Act;
- asking the landlord detailed questions about the impact on your business of any expected development of the building/shopping centre if the landlord’s disclosure statement contains insufficient detail;
- checking that your business is permitted in the premises;
- reviewing and explaining the terms of the proposed lease and associated documents (including opening hours, lessee’s/assignee’s and lessor’s/assignor’s disclosure statements, penalties for breaching terms of the lease, interest rates for late payment of rent, insurance required, whether the landlord requires a bond or a guarantee, the number and length of options, minimum required notice to the lessor if you wish to take up an option etc.).
We negotiate with the landlord as required (e.g. ground rules for rent increases, interest rates, number and period of options, period within which tenant can exercise option), witnessing your signature and facilitating registration of the lease with NSW Land Registry Services.
Contact us to guide you through every step of the process of taking out a commercial lease.