Buying or selling a business is a significant commercial transaction that involves more than agreeing on a price. Each stage of the process determines not only whether the deal proceeds, but also what risks and obligations remain after completion.
While the process may appear straightforward, business sales are structured through contracts, supported by investigation and influenced by timing. Understanding how these elements work together allows both buyers and sellers to approach the transaction with greater clarity and control.
The role of contracts in business transactions
The contract of sale does more than record the agreement between the parties, it defines exactly what is being bought and sold and on what terms ownership will change.
One of the most important distinctions in a business sale is whether the buyer is acquiring assets or shares. An asset sale typically allows the buyer to select specific parts of the business such as equipment, goodwill or intellectual property, while leaving certain liabilities behind. A share sale on the other hand, involves acquiring the company itself, including its existing rights and obligations.
The contract will usually include specific requirements that must be met before the sale can proceed. These are known as conditions and often include things like the buyer obtaining finance, the landlord approving the transfer of a lease or any required regulatory approvals being granted.
Each of these conditions must be satisfied within a set timeframe and until they are met, the deal is not yet locked in. If the conditions are not satisfied in time, one or both parties may be able to walk away from the agreement.
Because of this, the contract is not simply a formality, it is the mechanism that controls both the structure of the transaction and how it unfolds.
Due diligence: what are you actually taking on?
Due diligence is where a buyer moves beyond the surface of the business to understand what is actually being acquired, including its financial position, operations and any risks that may not be immediately visible.
Rather than simply confirming performance, this process involves looking more closely at areas such as unresolved disputes, unfavourable contracts, compliance issues or reliance on key customers or suppliers, all of which can affect the long-term value of the business.
For example, a business may appear profitable on paper but a closer review might reveal that a significant portion of its revenue depends on a single contract that is close to expiry. Without that insight, the buyer may be overvaluing what is being purchased.
The purpose of due diligence is not to prevent the transaction from proceeding, but to ensure it is entered into with a clear understanding of the risks involved. Where issues are identified, they can often be addressed through negotiation, adjustments to the purchase price or specific protections within the contract.
Employees and ongoing obligations
Employees do not automatically transfer in the same way as physical assets and how they are treated will depend on the structure of the transaction.
In an asset sale, employees are usually terminated by the seller and offered new employment by the buyer, which raises questions about continuity of service and responsibility for entitlements. In a share sale employment generally continues unchanged as the employing entity remains the same.
This distinction affects who is responsible for accrued leave, notice and redundancy and can have both legal and financial implications. Clarifying these arrangements early allows both parties to account for these obligations in the terms of the transaction, rather than leaving them to be addressed as an afterthought closer to settlement.
Responsibility and risk allocation
A common misconception is that once a business is sold, responsibility for past issues transfers entirely to the buyer. In practice, this depends on how the contract allocates risk.
Warranties and representations are used to set out what the seller is saying is true about the business at the time of sale, such as its financial position, whether it complies with relevant laws and whether there are any known issues or disputes.
This matters because when a buyer takes over a business they may also be taking on the consequences of what has happened before the sale, for example unpaid debts, compliance issues or problems under existing contracts. Without protection, those issues can become the buyer’s responsibility once the transaction is complete.
Warranties help manage this risk by giving the buyer a right to make a claim if those statements turn out to be incorrect. Indemnities are often used alongside this to deal with specific known risks, such as an existing dispute or a potential claim, by making it clear who will be responsible if that issue arises.
Together, these provisions determine how risk is allocated between the parties, meaning who bears the responsibility if something goes wrong after settlement.
The importance of early legal advice
One of the most common challenges in business transactions is seeking advice too late in the process. Once negotiations are well advanced or agreements have been informally reached, there may be limited opportunity to address underlying issues.
Seeking legal guidance early allows both buyers and sellers to structure the transaction appropriately, identify potential risks and ensure key terms are clearly documented from the outset.
Key steps in buying or selling a business
While each transaction will differ, the process generally involves:
- Agreeing on the key commercial terms including price, structure and inclusions
- Preparing and negotiating the contract of sale
- Conducting due diligence to assess financial, legal and operational risks
- Satisfying any conditions required before the sale can proceed, such as finance or approvals
- Confirming how employee arrangements and entitlements will be managed
- Completing settlement and formally transferring ownership.
Things to keep in mind
Throughout this process, there are a number of practical considerations that can help avoid delays and reduce the risk of complications.
Ensuring there is a clear understanding of what is included in the sale from the beginning can prevent misunderstandings later. Allowing sufficient time for due diligence and monitoring dates and deadlines is equally important, particularly where conditions must be satisfied before settlement.
It is also helpful to clarify employee arrangements early and seek advice before terms are finalised, rather than once the transaction is already underway.
Final thoughts
Buying or selling a business involves a series of interconnected legal and commercial decisions. While each transaction is different, the outcome is often based on how well the process is understood and managed.
Because these transactions involve ongoing obligations as well as immediate commitments, careful preparation and clear advice can make a significant difference to the result.
If you require advice about buying or selling a business, contact Aubrey Brown Lawyers on (02) 4350 3333 or visit aubreybrown.com.au.
