Care should be taken when buying a business to ensure that the transfer is properly effected and that you are properly protected legally.

Consideration should be given to what type of entity will buy the business - individual (sole trader), company, partnership or trust and the tax ramifications of the purchase or sale. Be aware of the effect GST may have.

Decide whether, on the basis of the due diligence conducted and the risks involved, you are comfortable with the purchase price and closely review the draft purchase agreement. The documentation should transfer all the relevant assets and liabilities. The assets may include property, business equipment, fixtures and fittings and any rights to use any names. The liabilities may include creditors of the business or the assignment of the lease of the business premises.

Remember agreements are legally binding and documentation should be checked by your solicitor. You should also seek accounting advice in relation to all the records for assets and liabilities, taxes and financial elements.

Other legal issues to consider:

• investigate employment agreements in relation to staff you may wish to employ
• check licences, patents and trademarks
• investigate the WorkCover claim record of the business.
• consider placing restrictions in the purchase agreement on the future trading activities of the vendor where this is in direct competition with the business you intend to purchase.
• Inspect contracts for current and future work with customers.
• Check for any outstanding litigation

Restraint of trade

When a business is bought or sold, the agreement usually contains a ‘restraint of trade’ clause. This restricts the seller from opening a competing enterprise within a set area and for a specified time.

Such clauses can also be included in a contract of employment to prevent employees from poaching customers or starting a similar business in an area.