A business agreement review before signing could save you from inheriting debts you did not know existed, losing the right to compete in your own industry, or discovering the "goodwill" you paid for was tied to a seller who immediately opened a competing shop next door. These situations happen more often than you might expect.
Business sale and purchase agreements tend to run 30 to 50 pages. They contain defined terms, cross-references, and schedules that interact in ways that are not obvious on a first read. This checklist identifies the areas where problems typically hide.
What You Are Actually Buying
The contract should include a detailed schedule of assets. This sounds obvious, but the schedule is often incomplete or vague. "Plant and equipment" tells you nothing. You need serial numbers, model numbers, and a clear statement of condition.
Check whether the following are included or excluded:
- Stock on hand (and how it will be valued at settlement)
- Work in progress and deposits received from customers
- Intellectual property, including business names, domain names, and trademarks
- Customer lists and databases
- Licences and permits (some cannot be transferred)
- Lease assignment for the premises
- Employee entitlements and transfer arrangements
If the business operates from leased premises, the landlord must consent to the lease assignment. This consent is not automatic. A commercial contract review should verify that settlement is conditional on obtaining this consent, or you may find yourself owning a business with nowhere to operate it.
Liabilities and What Transfers With the Business
Buyers often focus on what they are getting and overlook what they might be inheriting. The contract should clearly state that the seller retains responsibility for all debts and liabilities incurred before settlement.
Specific areas to check:
- Outstanding trade creditors
- Tax liabilities (GST, PAYG, superannuation)
- Employee entitlements accrued before settlement
- Pending or threatened legal claims
- Environmental contamination (for certain industries)
- Product liability for goods sold before settlement
The Australian Government requires certain contract reporting obligations for government transactions, but private business sales may not be subject to similar public disclosure requirements. You cannot rely solely on public records to identify all liabilities. The contract warranties and your own due diligence are your protection.
Warranties and Representations
Warranties are promises the seller makes about the business. If a warranty turns out to be false, you may have a claim for compensation. The strength of these warranties matters more than their number.
Standard warranties should cover:
- Accuracy of financial statements provided during due diligence
- Ownership of assets free from encumbrances
- No undisclosed liabilities
- Compliance with all applicable laws and regulations
- No pending or threatened litigation
- All material contracts have been disclosed
- No employees have been promised pay rises or bonuses
Sellers often try to limit warranties with phrases like "to the best of the seller's knowledge" or "so far as the seller is aware." These qualifications weaken your protection. A fixed fee lawyer contract review will identify these limitations and advise whether they are acceptable in your circumstances.
Restraint of Trade Clauses
If you are buying a business, you want the seller prevented from immediately starting a competing business and taking all the customers you just paid for. If you are selling, you want the restraint to be as narrow as possible so you can work again.
Restraint clauses specify three things: the activities restrained, the geographic area, and the time period. Australian courts will only enforce restraints that go no further than reasonably necessary to protect legitimate business interests.
A restraint preventing a café seller from operating any food business anywhere in Australia for ten years will almost certainly be unenforceable. A restraint preventing them from operating a café within 5 kilometres for two years is more likely to be upheld.
Many contracts include cascading restraints, where if the primary restraint is found too broad, lesser restraints apply. This is standard practice, but you should understand what you are agreeing to at each level.
Conditions Precedent
Conditions precedent are things that must happen before the sale completes. Common conditions include:
- Landlord consent to lease assignment
- Transfer of licences and permits
- Finance approval for the buyer
- Due diligence to the buyer's satisfaction
- No material adverse change in the business before settlement
The contract should specify what happens if a condition is not satisfied. Can either party terminate? Is there a deadline for satisfaction? Who bears the risk if a condition fails through no fault of either party?
Price Adjustments and Earn-Outs
The purchase price is rarely a single fixed number. Stock adjustments at settlement are common, where the final price increases or decreases based on stock value at the settlement date.
Earn-out arrangements tie part of the purchase price to the business's future performance. These create ongoing relationships and potential disputes. The contract must clearly define how performance is measured, what accounting methods apply, and how disputes about calculations are resolved.
If the seller is staying on as an employee or consultant during an earn-out period, consider what happens if they leave early or underperform. The interaction between employment terms and earn-out calculations can create unexpected outcomes.
Settlement and Transition
Settlement mechanics matter. The contract should specify:
- Exactly when ownership transfers
- What documents must be delivered at settlement
- How customer notifications will be handled
- The seller's obligations to assist with transition
- Access to records after settlement
Many disputes arise from unclear transition arrangements. If the seller promised to introduce you to major customers, that promise should be in writing with specific timeframes.
When to Get a Commercial Contract Review
The time to review a business sale agreement is before you sign, not after problems emerge. Once you have signed, your options narrow considerably.
A business agreement review by a lawyer will identify:
- Missing protections you should negotiate
- Unusual terms that favour the other party
- Risks that need to be addressed through due diligence
- Clauses that may be unenforceable
- Interactions between different parts of the contract
The WA Government's contract review template demonstrates the systematic approach needed for proper contract assessment, though private business sales require attention to different risk factors.
This information is general in nature. Contact us for advice specific to your situation.
