A business changes hands on the contract, not on the handshake.
A sale of business is several transactions running at once — a contract, a list of assets, a lease over the premises, the people who work in it, and a tax treatment. Any one of them can be the thing that moves the completion date.
Greenline Legal acts on business sales and purchases in New South Wales. We act for buyers and for sellers. This is general information about how these transactions work, not advice on a particular deal.
The contract, and what it is actually selling
Business sales here are commonly documented on a standard-form contract, with the substance in the special conditions and the schedules. The schedules are not administrative. They are the list of what changes hands: goodwill; plant, equipment and fittings, itemised so there is no argument later; stock in trade, counted at a stocktake before completion; the business name, domain names and intellectual property; and the records. What is excluded matters as much — debtors, creditors, and equipment under finance.
An asset sale transfers identified assets out of the seller's entity. A share sale transfers the entity itself, and its liabilities travel with it, which is why the due diligence and warranties differ. We act on both.
Due diligence
Due diligence is where a buyer tests whether the business it was shown is the business it is buying. It commonly covers the financial records behind the stated profit; the lease, and how much term is left; licences the business cannot trade without; searches of the Personal Property Securities Register, because plant on the floor may carry a security interest under the Personal Property Securities Act 2009 (Cth); company and litigation searches; supplier and customer contracts, and any change-of-control clause; and employee records.
A business without premises is usually not the business that was advertised. Where it trades from leased premises, completion commonly depends on the landlord consenting to an assignment or granting a new lease — a third party's decision, on a third party's timetable.
Premises and restraint of trade
An assignment is usually documented in a deed of consent. Where a lease contains a covenant against assigning without consent, section 133B of the Conveyancing Act 1919 (NSW) deems that covenant subject to a proviso that consent not be unreasonably withheld, and a further proviso that no fine is payable for it, despite any express provision to the contrary. It does not stop a landlord asking for financial information, guarantors or security, or a buyer needing to know whether an option to renew has been exercised.
A restraint of trade is what stops a seller opening again two streets away. Section 4(1) of the Restraints of Trade Act 1976 (NSW) — a statute no other Australian jurisdiction has — provides that a restraint is valid to the extent to which it is not against public policy, whether it is in severable terms or not, so one drawn too widely may still be enforced so far as it is reasonable. It is no licence to over-draft: section 4(3) lets the Supreme Court, on the application of the person restrained, order a restraint invalid where there was a manifest failure to attempt to make it reasonable.
Employees, GST and duty
On an asset sale employees do not transfer: employment with the seller ends, and the buyer decides whom to employ. Where employees are taken on, the transfer of business provisions in Part 2-8 of the Fair Work Act 2009 (Cth) can apply, and service with the seller will generally count as service with the buyer — subject to a limited ability for a buyer that is not an associated entity of the seller to decline recognition of earlier service, on written notice before employment starts. Whether accrued leave is paid out or assumed against a price adjustment is a commercial term the contract has to settle.
A sale can be GST-free as the supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth), but only where the conditions are met: the supply is for consideration; the buyer is registered or required to be registered for GST; the parties have agreed in writing that the supply is of a going concern; and the seller supplies all of the things necessary for the continued operation of the enterprise and carries it on until the day of the supply. Duty depends on what is included: where an interest in land forms part of the sale, the Duties Act 1997 (NSW) applies.
Related matters
Questions we are asked about business sales.
What is the difference between an asset sale and a share sale?
An asset sale transfers identified assets — goodwill, plant, stock, the business name — out of the seller's entity, and the seller keeps the entity and generally its history. A share sale transfers the company itself, so its liabilities, contracts and tax position go with it. That difference drives the due diligence, the warranties and the price. We act on both.
Is the sale of a business GST-free?
Not automatically. Section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) treats the supply of a going concern as GST-free only where the conditions are met: the supply is for consideration, the buyer is registered or required to be registered for GST, the parties have agreed in writing that the supply is of a going concern, and the seller supplies everything necessary for the continued operation of the enterprise and carries it on until the day of the supply.
What happens to the lease over the premises?
Either the existing lease is assigned to the buyer with the landlord's consent, or the landlord grants the buyer a new lease. Where the lease has a covenant against assigning without consent, section 133B of the Conveyancing Act 1919 (NSW) deems it subject to a proviso that consent not be unreasonably withheld. A landlord can still ask for financial information, guarantors and security. It is commonly a condition of completion, and commonly the slowest part.
Do the employees come with the business?
On an asset sale, no. Employment with the seller ends and the buyer decides who to offer employment to. Where employees are taken on, the transfer of business provisions in Part 2-8 of the Fair Work Act 2009 (Cth) can apply, and service with the seller will generally count as service with the buyer — subject to a limited ability for an unrelated buyer to decline recognition on written notice before the new employment starts. The contract has to deal with accrued leave expressly.
Is a restraint of trade in a sale contract worth anything?
In New South Wales it can be. Section 4(1) of the Restraints of Trade Act 1976 (NSW) provides that a restraint is valid to the extent to which it is not against public policy, whether it is in severable terms or not — so one drawn too widely may still be enforced so far as it is reasonable. Section 4(3) cuts the other way: on application by the person restrained, the Supreme Court may order a restraint invalid where there was a manifest failure to attempt to make it reasonable.
Tell us what's happened.
Tell us what is being bought or sold, whether the premises are leased, and what stage the contract has reached.
Information on this site is general in nature and is not legal advice, and may have been overtaken by a change in the law. Contacting us does not create a solicitor–client relationship.