1. SALE OF A BUSINESS: RISK ISSUES
“Risk Factors and Due Diligence”
Presented by:
Tom Meagher
Director – Commercial Law
© Murfett Legal 2013

2. Disclaimer
• The information presented in this seminar is intended only as a guide, as to
the topic and the matters discussed.
• This seminar is not legal advice and must not be relied on as such.
• If you have a matter which relates to this seminar or you require legal
advice, careful review and analysis of your matter’s particular facts,
information and documents is required before proper legal advice can be
given or applied to your matter.
© Murfett Legal 2013

3. © Murfett Legal 2013
Tom Meagher | Director | Commercial Law
Tom has over 20 years’ business experience; including
working for major national and local law firms, owning and
managing an IT businesses, and being a director and in-
house counsel for a public company.
Tom has excellent communication, technology and
personal skills with a proven ability to develop business
relationships and maintain clients.
Tom’s clients include a broad range of local and national
businesses and organisations (including not-for-profit
entities), accounting firms, financial brokers and advisers,
franchisors and high net-wealth families.
Tom is also a regular presenter of seminars to various client groups and
professional bodies on a wide range of commercial law topics.
Based on Tom’s training and business experience, he has a unique
understanding of his clients’ objectives and legal needs. Tom is therefore able to
provide a very client-focused and commercial approach to all your dealings.

4. Risk Factors and Due Diligence
(Buyer Perspective)
1. Ensuring the contract permits for an appropriately-scoped and
comprehensive due diligence
• Before Contracting
– The Buyer is buying business and not shares etc.
– Assuming correct Buyer entity (note: “related parties”
with OSR),
– FIRB / Foreign Buyer
– Seller’s authorised party to contract
– Type and size of business being bought
– Consider whether a confidentiality deed may be required (uni- or bilateral)
– Indicative financial approval – strongly consider incorporating banks sought
covenants
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5. – What is the ‘purchase price’ = Goodwill (e.g. business name, trademarks, clients,
P&E, Stock & licences. Also, will it be:
o cash; or
o say, for shares (e.g. an ‘assets for equity’ deal)
– Does the Buyer actually have enough cash to by the business? (It will be a lot
more than their just paying the purchase price (e.g. transfer duty, finance fees,
bank guarantees for premises, advisor fees, settlement/transfer costs, working
capital etc)
– Full purchase of business or partial business ‘asset’ purchase, and therefore not
a going concern.
– Purchase Price + SAV?
– Outright purchase price payment at settlement or ‘earn-out payments by
instalments (e.g. 25% - 75% of the balance of the purchase price paid 6mths to 2
years) after Settlement (note: this is vendor finance, therefore consider PPSR
and security for payment).
– Ceiling and floor , with Seller ‘blue sky’ or replaced ‘lost clients’ , clauses.
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1. Ensuring the contract permits for an appropriately-scoped and
comprehensive due diligence (cont.)

6. © Murfett Legal 2013
1. Ensuring the contract permits for an appropriately-scoped and
comprehensive due diligence (cont.)
• Conditions Precedent
– Identify the seller(s)? - multi-party Business Purchase agreements.
– Conditional or ‘phased’ deposits(s). Interest on deposit
– Ability to adjust ‘offered’ purchase price (and to ‘contractually retain’ Seller) once
preliminary due diligence completed. Also with loss of any key franchise, license
or distribution agreements?
– Consider a business valuation.
– Review of:
o Past 2-3 years $financial statements, P&E schedules, sale figures, client/customer
lists etc.
o Key contracts (e.g. exclusive supplier/distributor or agency agreements)

7. © Murfett Legal 2013
1. Ensuring the contract permits for an appropriately-scoped and
comprehensive due diligence (cont.)
o Lease of premises and determine:
 if any re-fit/make good
 permitted use
 relocation and demolition of premises provisions
 options to renew/acquire (register caveat or lease) exists
 ‘site-based goodwill’ plus check for ‘fixtures’ or lessor’s chattels being sold.
o Employment and subcontractors agreements - Key employee clause and also
are they under the correct arrangements/Awards etc. Also are there any
‘excess’/or ‘problems children’ employees that should be made redundant by the
Seller pre-settlement).
– PPSA’s registration effects on equipment
– Consider Purchase Price ‘retention sum’ linked to earn-out (particularly for
services based business. This is rather than the Buyer having to have recourse
to possible warranty (etc.) claims against the Seller.
– Third party approvals, waivers and consents (e.g. consent assignment of lease,
transfer of license, 1st right of refusal etc.)

8. – Physical inspection of business, premises and asset. Consider asset ‘cherry
picking’ clause. Photos of premises (state) and equipment; also PPSA serial
numbered goods (e.g. vehicles, boats, aircraft).
– Stock-take clause
– Lease (note: release of Seller’s deposit and bank guarantees).
– Employment agreements (payroll, payslips, start dates etc).
– Transmission of business and ‘amortisation factor’ (e.g. 60%-70%) for accrued
transferring employees’ liabilities.
– Relevant license or authorities that may apply to the business (e.g. pharmacy,
childcare, food sales).
– Seller to perfect or ratify deficient/non-existent ‘key’ business arrangements (trust
T&Cs, ‘off-take’/key contributors, contracts, outstanding leases, PPSR
registrations and key contracts).
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1. Ensuring the contract permits for an appropriately-scoped
and comprehensive due diligence (continued)

9. 2. Documents to be reviewed and warranties and guarantees to be sought
• Seller Warranties and Covenants
– Warranties and representations:
o Seller or Agent prior representations and indemnities
o Seller’s covenanters or guarantors
– Indemnities and release
– Restraints of Trade and Protective Covenants (of employees)
– Business/Product/Service Names vs. Trademarks - copyright
– Privacy Act compliance (e.g. sale of private information, express prior consent)
– Confidentiality and ‘No Publicity and/or Disparaging Remarks’ provisions
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10. 3. Understanding the various statutory business registers relevant to the
sale of business
– ASIC (www.asic.gov.au)
– Business Name Register (www.asic.gov.au)
– Australian Business Register (www.abr.business.gov.au)
– PPS Register (www.ppsr.gov.au)
– IP Australia (www.ipaustralia.gov.au)
– Local council
– Any statutory permits, licences etc (note: BLIS –www.ablis.business.gov.au)
– Also statutory’ ‘gate keepers e.g. Pharmacy Council, DGRL
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11. 4. Who or what will be the “lowest common denominator“ in achieving a
successful due diligence and settlement?
– Has the Seller retained a suitably competent and experienced Business
Settlement agent or Commercial Lawyer?
o The Buyer should not have to ‘subside’ the Seller, in the Seller’s required effecting
a smooth sale and settlement to them of the business they’re paying good money
for!
– Limited retainer and ‘scope creep’.
– Third Parties: Lessors, Financiers, Franchisors/Licensors, Key Employees,
Secured Parties and Statutory Approvals.
– Business Brokers: how to control them/ keep them happy.
– Settlement dates: Fixed or ‘incentivised’ (e.g. “upon the last the last of the
conditions precedent being met (or waived) plus 2-5 business days” and
“acceleration of clause”)?
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12. 5. Mitigating the risk factors, both pre-and post-settlement
• Pre-settlement
– Ensuring proper accounting and legal advice obtained re: that particular
business and the proposed transactions
– Will all the stakeholders be available/ accessible at settlement? (e.g. you don’t
want the lessor to be on holidays and can’t get an assignment of the lease)
– Maintaining of advertising.
– Maintenance and insurance of business until settlement (suggest don’t let the
business’ stock levels be run-down or run-up)
– Ensure that bank conditions are met and understanding the difference between:
o “unconditional finance approval”; and
o “funds available for settlement”.
– Premises keys, codes, domain names, software licenses and passwords etc
– Full discharge on PPSR or signed Deed of Release from the Secured Party (NB:
there are not any ASIC 312 forms anymore!)
– Draft settlement statement
–
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13. 5. Mitigating the risk factors, both pre-and post-settlement (cont.)
• Post-settlement
– Seller’s assistance of Buyer with business and/or introductions to
clients/customers, key suppliers etc.
– Seller’s handover / working in business
– Further assurances provisions.
– Seller transfer duty lodgement obligations (and concessional transfer duty to
OSR)
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14. 6. Concessional rate of transfer duty – Section 79 – 86 of the Duties Act 2008
• A dutiable value of the dutiable property which does not exceed $200,000 may be
assessed at the concessional rate of duty.
• The concessional rate of transfer duty is as follows:
$ 0 - $100,000 $1.50 Per $100 or part thereof
$100,001 - $200,000 $1,500 + $4.39 Per $100 or part thereof above $100,000
• An application for an assessment at the concessional rate of transfer duty should
accompany the relevant transaction record when it is lodged.
• The appropriate application form is available from the Office of State Revenue
website at www.osr.wa.gov.au
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15. 7. Section 280(2)(b) of the Duties Act
• Under section 280 (2)(b) of the Duties Act 2008, after the expiry of the time
provided under section 23 within which an instrument is to be lodged for duty
endorsement:
• a person who is not a party to the dutiable transaction effected by the
instrument, acts under the instrument,
• that person must, as soon as practicable, lodge the instrument or give notice
of the instrument to the Commissioner.
• Penalty is a fine of $20,000.
• Section 23 - “within 2 months after the day on which liability for duty on the
transaction arises”.

16. © Murfett Legal 2013
THANK YOU
tom@murfett.com.au
www.murfett.com.au