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ISSUES TO CONSIDER WHEN BUYING OR SELLING A LICENCED BUSINESS

ISSUES TO CONSIDER WHEN BUYING OR SELLING A LICENCED BUSINESS

With any business sale or purchase it is important to carefully consider the nature of the business and the assets being sold or purchased.

It is crucial to separately identify the assets included in the sale and also to identify any to be excluded.

Business assets of a licensed business typically include plant and equipment, stock, goodwill, the liquor licence, gaming machine entitlements, furniture, the lease, the business name and any intellectual property, such as a distinctive logo or name and the benefit of any service or supply contracts.

Issues to consider when negotiating and documenting a transaction involving licensed premises include:

The apportionment of the price between the different assets being sold.

Some assets may be depreciable or may have been acquired at different times, for example, before the introduction of capital gains tax in September 1985. Also, there are usually competing interests between the vendor and purchaser as to the value to be placed on depreciable assets. Whilst the purchaser will want a high value to be put on these assets to maximise future depreciation, the vendor will usually want them recorded in the agreement at their written down value to avoid tax on any excess over that written down value. In any event, you should not overlook the written down values to the date of completion rather than simply use the values as at the previous June 30.

Due Diligence.

Another issue is whether exchange is to occur with a provision enabling the purchaser to conduct an investigation or due diligence of the business and to rescind, that is, to bring the contract to an end within a certain period if the results are not satisfactory to the purchaser. This would enable a quick exchange in a hot market and if the contract is rescinded it would be usual for the vendor to retain a pre agreed sum. This procedure is similar in effect to an option but can be a useful tool.

If a sale of the freehold is involved is it owned by a different entity or person to the business?

This should be clearly set out in the contract. For asset protection and taxation reasons a purchaser should consider acquiring the freehold and the business in different entities. Whether or not this is to occur separate values should be allocated for each business asset as well as between the business assets collectively and the freehold.

Procedures to follow between exchange and completion to transfer the licence including any gaming machine entitlements.

A realistic timing and the possibility of any objections should be covered in the contract. If the licence and entitlements are not transferred by a certain date and the parties have done their best to achieve this, do either or both parties have a right to rescind? If so, the purchaser will be entitled to repayment of the deposit. Will the vendor be entitled to retain any predetermined amount as compensation for lost opportunities? The alternatives to this are to extend completion date or if the completion date is important to complete even though the transfer of the licence has not occurred. This last alternative should be considered carefully, as particularly after completion, the vendor's licensee will be legally responsible for any license breaches by the purchaser.

The basis of valuation of stock.

It is common for beer to be valued on the basis of the brewery price plus freight and for other liquor to be valued on the basis of the wholesale price list of the particular supplier. Also, if the stock price or any part of the purchase price is not to be paid on completion the security for the payment such as a bank guarantee, mortgage or company charge should be covered.

There are many other issues which should be considered in any business sale, such as employee entitlements, warranties as to turnover and profitability and GST.

FURTHER INFORMATION 

This Information Outline is provided courtesy of Matthews Folbigg who are experienced in this area of law. They are located at Level 7 The Barrington, 10-14 Smith Street, Parramatta NSW 2124 or call them on (02) 9635-7966 if you would like more information on this legal topic, or you wish to obtain formal advice regarding your situation.

MatthewsFolbigg is a large commercial law firm based in Parramatta, New South Wales. The firm has Accredited Specialists in Business Law, Property, Immigration, Family Law and Personal Injury. MatthewsFolbigg has specialist groups advising clients in corporate structures, intellectual property, and information technology plus franchising, estate planning and insolvency work.

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