Are you planning to buy or sell a business? A contract of sale of business is a legally binding document that outlines the terms and conditions of the transaction. It details key aspects such as the purchase price, payment terms, warranties, liabilities, and restrictions on future competition.
This contract is essential to protect both the buyer and the seller, ensuring a smooth and fair transfer of ownership.
A well-drafted contract helps avoid disputes, clarifies expectations, and secures the business’s value. Understanding its key clauses is critical before signing. Below, we break down the most important parts of a contract of sale of business in simple terms.
Purchase Price and Payment Structure
One of the most important elements of a contract of sale of business is the purchase price and how it will be paid.
How Is the Business Valued?
The value of a business depends on various factors, including:
- The company’s financial performance (profits and revenue)
- The value of its physical and digital assets
- Its reputation and customer base (goodwill)
- Future growth potential
- A professional valuation can help determine a fair market price for the business.
What Does the Purchase Price Include?
The purchase price might include:
- Physical Assets: Equipment, machinery, furniture, stock
- Intangible Assets: Business name, trademarks, goodwill
- Contracts and Licenses: Lease agreements, supplier contracts
How Are Payments Made?
Payments can be structured in different ways:
- Lump Sum Payment: The buyer pays the full amount upfront.
- Instalments: The buyer pays over a period of time.
- Vendor Finance: The seller allows the buyer to pay in instalments while still operating the business.
The contract should specify the exact terms to prevent future misunderstandings.
Warranties and Representations
Warranties and representations are promises made by the seller to assure the buyer that the business is in good standing.
What Do Warranties Cover?
Sellers typically guarantee that:
- The business is legally owned by them.
- The financial records are accurate.
- There are no hidden debts or liabilities.
- All licences and permits are valid.
If the seller provides false information, the buyer may have legal grounds to cancel the sale or seek compensation.
Why Are These Clauses Important?
Without warranties, the buyer risks purchasing a business that has hidden financial or legal problems. These clauses ensure transparency and protect the buyer from future disputes.
Also Read: Buying a Business Tips: A Guide to Safe Purchasing
Restraint of Trade and Non-Compete Clauses
After selling a business, a seller might be tempted to start a new business in the same industry. To prevent unfair competition, a restraint of trade or non-compete clause is included in the contract.
What Do These Clauses Cover?
- Timeframe: How long the seller is restricted from competing.
- Geographical Area: The locations where competition is prohibited.
- Industry Scope: The type of business the seller is restricted from operating.
For example, if a café owner sells their business, the contract may prevent them from opening another café within a 10 km radius for five years.
Are These Clauses Enforceable?
Yes, but they must be reasonable. If the restrictions are too broad or last too long, a court may not enforce them. The aim is to protect the buyer without unfairly restricting the seller’s ability to earn a living.
Liabilities and Employee Transition
When buying a business, it’s crucial to clarify who is responsible for existing debts, contracts, and employees.
Who Pays Existing Debts?
The contract should state whether the buyer takes on the seller’s debts, such as:
- Outstanding supplier payments
- Loans and financial obligations
- Pending tax liabilities
If the buyer is not taking responsibility for these debts, the seller must pay them before the sale is finalised.
What Happens to Employees?
A business sale can affect employees in different ways:
- Transfer of Employment: The buyer agrees to keep existing employees.
- New Contracts: Employees may be required to sign new employment agreements.
- Redundancies: If the buyer does not want to retain certain employees, the seller may be responsible for redundancy payouts.
It is important to comply with Australian employment laws and provide employees with fair treatment during the transition.
Also Read: 7 Tips to Successfully Buy a Small Business in QLD
Default and Termination Terms
A contract should clearly outline what happens if either party fails to meet their obligations.
What Constitutes a Breach?
A breach of contract can occur if:
- The buyer fails to pay as agreed.
- The seller misrepresents the business’s financial health.
- Either party fails to meet conditions outlined in the agreement.
What Are the Consequences of a Breach?
- Loss of Deposit: The buyer may forfeit their deposit if they back out without a valid reason.
- Legal Action: The wronged party may take legal action to recover losses.
- Contract Termination: If a breach is serious, the contract may be voided.
A well-drafted contract will include a dispute resolution clause, specifying how conflicts will be handled—whether through mediation, arbitration, or court action.
Protect Your Business Interests with Walker Pender
A contract of sale of business is a critical document that protects both the buyer and the seller. By clearly outlining the purchase price, warranties, competition restrictions, liabilities, and default terms, the contract ensures a fair and legally sound transaction.
Before signing, both parties should seek professional legal advice to fully understand their rights and obligations. A poorly drafted contract can lead to disputes, financial loss, or even legal battles. Investing time in reviewing and negotiating key clauses can prevent future complications.
Buying or selling a business is a major decision that requires careful legal planning. At Walker Pender, our experienced business lawyers provide tailored advice to ensure your contract is fair, legally sound, and protects your interests. Contact us today for a consultation and safeguard your business transaction with expert legal support.
