One of the most crucial decisions in the life of a business is deciding whether the business will be passed on to family members or whether the business should be sold. Regardless of which option is pursued, a business requires a warrant of fitness to be a viable option.
This will require ensuring that business records are sufficient for the purposes of due diligence by a prospective purchaser, trustee or extended family. By anticipating the requirements of the due diligence process, the viability of a business as an attractive option for purchase or succession will be increased.
Due diligence is about ensuring that a decision to purchase a business is fully informed and that there will be no future unpleasant surprises. It enables the purchaser to rely on his or her own investigations, information gathered and judgment as to whether or not the business is a sound investment.
Warranties as to the state of the business are only as good as the person giving them. Undertaking appropriate due diligence processes will assist in precluding future liability of the vendor. Essentially, the due diligence process represents a checklist for the purchaser on acquisition of the business whether by way of succession or by sale.
Purchaser's checklist on succession and/or sale
Anticipate speculation on behalf of the purchaser or successor as to the reason for succession and/or sale
- Declining business.
- Changes in character of the locality.
- Lack of competitive strengths.
- Expiring lease or franchise.
- Imminent rent review.
- Future loss of business because of actual or anticipated changes in government policy.
- Change in zoning.
- Change in roading.
- Problems with creditors or suppliers.
- Critical staff retiring.
- Labour problems.
- Bad reputation which may stay with the business.
- Capital assets require replacement.
If any of these reasons have promoted the sale or succession of the business, they will have consequent effect on the purchase price.
Action List by the Solicitor or Professional Adviser for the Purchaser or Successor
The solicitor or professional adviser assisting the successor or purchaser will undertake a review of the instruction, status and contractual arrangements pertaining to the business. This will include the following:
- The components of the purchase price.
- GST and tax positions.
- Valuation requirements.
- Insurance/risk requirements.
- The chattels being purchased.
- Employee issues.
- Grape supply contracts.
- Licences to operate the business (e.g. Sale of Liquor Licences and Food Premises Registration Licences).
- Warranties required from the vendor. Examples are warranties as to the financial accounts, turnover, a period of assistance from the vendor, restraints of trade, encumbrances on the property, debts, liabilities, licences and consents.
- Review the title and any lease or licence documentation.
- The means of funding the purchase.
- The payment of any fees.
There are a number of different ways a business can be owned. The most common ownership structures include:
- Individual/personal ownership;
- Shares in a company;
- Trading Trusts;
- Family Trusts;
- Joint Ventures;
- Limited Partnerships.
The right ownership structure for a business can only be ascertained by a review of the particular facts and circumstances of each case.
However, many businesses are owned directly or indirectly by the trustees of a trading trust or a family trust. The trustees may own the assets of the business directly or may own shares in a company that carries on the business.
There can be some advantages to having the business owned by the trustees of a trust, including creditor protection and as a mechanism for "passing" the business to family members (in their capacities as beneficiaries of the trust) without, for example, needing to transfer ownership of the shares if they are held by the trustees.
When considering succession planning, it is important that you have an up to date Will. It can also be useful to put in place enduring powers of attorney in relation to property and in relation to personal care and welfare.