Business Sale Agreements in Victoria: Key Legal Issues Before You Sign

What Is a Business Sale Agreement?

A business sale agreement is the contract that records the terms on which a business changes hands. It identifies what is being sold, the price and how it is calculated, the conditions that must be satisfied before completion, the warranties each party gives, the events that allow termination, and what happens after settlement. It is typically supported by a suite of ancillary documents — disclosure letters, restraints, transitional services agreements, lease assignments, employment offers and intellectual property assignments.

For all but the smallest transactions, the agreement is a bespoke document, not a template. The protections a buyer of a hospitality business needs are very different from those required by a buyer of a professional services practice or a distribution business with significant inventory. A well-drafted agreement reflects the risks specific to the particular industry, structure and parties.

Asset Sale vs Share Sale

One of the earliest decisions in any business sale is whether the transaction will be structured as an asset sale or a share sale. The choice has significant legal, tax and commercial consequences.

Asset sale. The buyer acquires the individual assets that comprise the business — goodwill, plant and equipment, stock, intellectual property, the benefit of certain contracts and sometimes the business name. The selling entity remains in existence and retains anything not specifically sold, including unwanted liabilities. Asset sales let the buyer leave behind historic tax, employee, contractual and litigation exposures, and they often produce a higher tax basis in the assets acquired. However, every transferring contract requires the counterparty's consent, the lease must be assigned, employees must be offered new employment, and licences and permits must usually be re-issued — all of which takes time and creates conditional-completion risk.

Share sale. The buyer acquires the shares in the company that owns the business. The company continues to operate with all of its assets, contracts, employees, premises and liabilities intact — including historical liabilities the buyer may not yet have discovered. Share sales avoid the consent and re-papering exercise of an asset sale, which is particularly attractive where the business depends on a small number of difficult-to-assign contracts (long-term supply agreements, government tenders, regulatory licences). The trade-off is that the buyer inherits everything, so due diligence and warranty protection must be considerably more rigorous.

Why legal advice matters early. The structure decision also drives the tax outcome for the seller, the stamp duty position, the GST treatment, the capital gains tax calculations and the access to the small business CGT concessions. Sellers and buyers should obtain coordinated legal and tax advice before signing any term sheet — once heads of agreement are signed, switching from one structure to the other is awkward and may require concessions on price or terms.

Due Diligence Before Signing

Due diligence is the systematic investigation that allows a buyer to verify what it is buying. It is not a formality; it is the primary risk-management exercise in a business sale and almost always justifies its cost. Legal due diligence usually runs in parallel with financial and commercial due diligence and covers the following areas at a minimum.

• Financial records. Audited or compiled financial statements for at least three years, management accounts, bank statements, tax returns and BAS lodgments, ATO portals confirming there are no outstanding debts, and evidence of compliance with PAYG, superannuation and payroll tax obligations.
• Contracts and key customers. The buyer should review every material customer contract, the standard terms of trade, any exclusivity or volume commitments, change-of-control clauses and termination rights. Concentration risk — where a small number of customers generate most of the revenue — should be specifically tested.
• Supplier arrangements. Supply agreements, minimum-purchase commitments, price-rise mechanisms and termination rights. The buyer should identify any sole-source suppliers and assess whether key supplier relationships are personal to the current owner.
• Employment issues. Employment contracts, modern award coverage, payroll registers, accrued annual leave and long service leave, superannuation compliance, current workplace investigations or claims, and any restraint obligations binding key staff. Independent contractor arrangements should be tested against the current sham contracting and casual employment rules.
• Regulatory licences and permits. Liquor licences, food handling certificates, transport accreditations, health and safety permits, industry-specific authorisations and local-government registrations. Whether each licence can be transferred — and on what conditions — is a question for due diligence, not settlement day.
• Litigation and disputes. Current proceedings, threatened proceedings, recent settlements, customer complaints, warranty claims and product recalls. The seller's insurance position — claims history, run-off cover and the treatment of "claims made" policies after settlement — should be specifically addressed.
• Intellectual property ownership. Registered trade marks, business names, domain names, copyright in software and marketing materials, design rights, and the chain of title to each. A buyer should confirm that key IP is owned by the seller — not, for example, a former contractor or a related entity that is not party to the transaction.
• PPSR searches. Searches of the Personal Property Securities Register identify any registered security interests over the business assets. Where releases are required, they should be arranged before settlement, not after. Our companion article on how the PPSR works and why it matters explains the practical issues in more detail.

Issues uncovered in due diligence are not necessarily deal- breakers. Most are dealt with by adjusting the price, adding a specific indemnity, requiring a condition precedent to be satisfied before settlement, or excluding a particular asset or liability. The risk that matters is the issue you did not look for and did not find.

Purchase Price Adjustments

The headline price agreed at heads of agreement stage is almost never the amount that changes hands at settlement. Most business sale agreements include mechanisms to adjust the price for movements in the underlying business between signing and completion.

• Stock valuation. Stocktakes on the day before settlement allow the price to be adjusted up or down for variations in inventory levels. The agreement should specify the valuation method (cost, net realisable value, lower-of-cost- and-NRV), how obsolete stock is treated, and the process for resolving disputes about quality or quantity.
• Work in progress. Particularly important in professional services, construction and project-based businesses. Whether WIP transfers to the buyer, and at what valuation, should be set out clearly.
• Debtors and creditors. The agreement should specify whether trade debtors and creditors transfer to the buyer, are collected on the seller's behalf, or are excluded from the sale altogether. The treatment has cash flow consequences for both parties.
• Earn-outs. Part of the price is deferred and calculated by reference to post-completion performance. Earn- outs bridge valuation gaps but generate disputes about how the business has been operated, how performance is measured and whether the buyer has done anything to depress the metric. Careful drafting and a clear dispute resolution mechanism are essential.
• Completion accounts. A formal balance sheet prepared as at completion is used to verify that the agreed level of working capital, net assets or cash has been delivered, with corresponding adjustments to the purchase price. Disputes about completion accounts are common and usually require an expert determination clause.

Restraint of Trade Clauses

Restraints are a near-universal feature of business sale agreements. The buyer has paid for goodwill — the existing customer relationships, reputation and trade flows of the business — and is entitled to protect that investment by preventing the seller from setting up in immediate competition.

Victorian courts will enforce restraints in business sale agreements provided they go no further than is reasonably necessary to protect the buyer's legitimate interests. Three elements are examined: the activities restrained, the geographic area and the duration. Restraints tied to a sale of goodwill are generally treated more favourably than restraints between employer and employee, but each element must still be justifiable.

Geographic limits. The restrained area should reflect the territory in which the business actually operates. For a local retail business, a few kilometres may be appropriate. For a national wholesale business, statewide or nationwide restraints may be defensible.

Time limits. Periods of one to three years are common; longer periods may be enforceable in sales of substantial businesses or where the seller retains significant sale proceeds. Periods that exceed what is needed to allow the buyer to bed down the customer base are vulnerable.

Cascading drafting. Because a single overreaching restraint can be struck down in its entirety, sale agreements commonly use cascading restraints — every combination of duration and territory is drafted as a separate alternative, and the court selects the longest enforceable version. Cascades only work if drafted carefully; sloppy cascade drafting is one of the most common causes of restraints being unenforceable.

Employees and Workplace Obligations

Employees are often the most valuable, and the most legally complex, part of a business being sold. The treatment of employees differs fundamentally between asset and share sales.

In an asset sale, employees do not automatically transfer. The seller terminates the existing employment, the buyer makes offers to selected staff, and accepted offers create new employment relationships. Key issues include:

• Annual leave and long service leave. Accrued entitlements can be paid out by the seller on termination, or transferred to the buyer with a price adjustment. The Fair Work Act and the Long Service Leave Act 2018 (Vic) set the framework, and getting the recognition-of-service position wrong creates exposure for both parties.
• Redundancy. If the buyer offers comparable employment on no less favourable terms and recognises prior service, the seller may avoid redundancy pay liabilities. If the buyer does not, the seller pays redundancy. The agreement should allocate this cost expressly.
• Fair Work obligations. Award coverage, annualised salary arrangements, casual conversion rights and the right-to-disconnect framework all continue to apply after settlement. The buyer inherits these obligations from day one.

In a share sale, employment is unaffected — but the buyer inherits every accrued entitlement, every pending unfair dismissal or general protections claim, and every historical superannuation or payroll tax under-payment. Employment due diligence is correspondingly more searching.

Leases and Property Issues

Most businesses operate from leased premises. The lease is often the single most important contract being transferred, and the assignment process routinely takes longer than the parties anticipate.

Assignment of lease. A commercial lease cannot be assigned without the landlord's consent, but consent cannot be unreasonably withheld. The agreement should make landlord consent a condition precedent to completion and allocate the cost of obtaining consent (typically borne by the buyer).

Retail lease considerations. The Retail Leases Act 2003 (Vic) imposes additional disclosure and procedural requirements on assignments of retail leases — the assignor must give the assignee a disclosure statement, the assignee must obtain financial advice in some cases, and the landlord must respond to the assignment request within a defined period. Non- compliance can affect the validity of the assignment.

Occupancy risks. Short remaining term, onerous make-good obligations, lack of an option to renew, percentage rent triggered by sale, and personal guarantees from the outgoing tenant are all issues that should be identified in due diligence and reflected in the price or the structure of the transaction.

Warranties and Indemnities

Warranties are contractual statements by the seller about the business. If they prove untrue, the buyer can claim damages. Indemnities are promises to compensate the buyer dollar-for- dollar for specific losses — typically the issues identified in due diligence that the seller is unwilling to warrant generally.

Common warranty categories include ownership and title to assets, accuracy of financial statements, accuracy of disclosed information, compliance with laws and licences, condition of plant and equipment, validity of intellectual property, status of contracts, employment compliance, absence of undisclosed litigation, environmental compliance and tax compliance.

Disclosure processes. Sellers limit warranty exposure by disclosing specific matters in a disclosure letter — once a matter is disclosed, the buyer cannot bring a warranty claim based on it. The disclosure letter is heavily negotiated and is one of the most important documents in the transaction.

Caps, thresholds and time limits. Warranty claims are usually subject to monetary caps (commonly a percentage of the purchase price), de minimis thresholds (small claims are excluded), basket thresholds (claims aggregate until a defined total is reached) and time limits (general warranties typically expire 18 to 24 months after settlement, tax warranties run for longer).

Consequences of inaccurate disclosure. Sellers should treat the warranty and disclosure exercise seriously. Misleading or deceptive conduct in the negotiation process can give rise to claims under the Australian Consumer Law that are not limited by the contractual caps the seller has negotiated.

Settlement and Completion

Settlement is the day on which title to the business passes, the price is paid and the legal documents are exchanged. The path to settlement is governed by the conditions precedent and the completion checklist.

• Conditions precedent. Common conditions include satisfactory completion of due diligence, landlord consent to assignment of the lease, transfer of key licences, obtaining required regulatory approvals (such as Foreign Investment Review Board approval if applicable), and consent from material customers or suppliers where contracts contain change-of-control clauses.
• Third-party consents. Consents from landlords, franchisors, funders, key customers and licensing authorities should be requested as early as possible. The process is rarely fast.
• Settlement checklists. The agreement should set out exactly what each party will deliver at settlement — signed assignments, releases of PPSR registrations, updated ASIC registers, employee transfer documents, keys, passwords, customer data, intellectual property assignments and the transitional services agreement (if any).
• Post-completion obligations. Cooperation in the transfer of customer relationships, completion accounts preparation, restraints, transitional services, earn-out monitoring and ongoing assistance with the run-off of pre- completion matters frequently extend the parties' involvement for months or years after settlement.

Common Mistakes in Business Sales

• Signing heads of agreement too early. Even "non-binding" heads of agreement create commercial momentum that is difficult to reverse. Key terms — structure, restraint scope, treatment of employees — should be settled before signing.
• Inadequate due diligence. Skipping due diligence to save cost or accelerate timing is consistently the most expensive mistake buyers make. Sellers also benefit from running their own pre-sale review to identify issues that would otherwise derail negotiation.
• Poor restraint drafting. Overreaching restraints without a properly drafted cascade are commonly struck down in their entirety, leaving the buyer with no protection at all.
• Ignoring employee liabilities. Underestimating accrued leave, long service leave, superannuation arrears, payroll tax exposure and award compliance risk can wipe out the value of the deal.
• Failing to obtain landlord approval. Treating landlord consent as a settlement-day formality leads to delayed completion, conditional re-negotiation and sometimes the loss of the premises altogether.
• Overlooking PPSR issues. Buyers that complete without clearing registered security interests over the assets they are buying can find those assets repossessed by the secured creditor.

When to Obtain Legal Advice

Both buyers and sellers benefit from engaging a lawyer early — ideally before any preliminary document is signed. A lawyer can advise on structure, prepare or review the heads of agreement, scope due diligence, manage warranty and disclosure negotiations, coordinate landlord and licence consents, and protect your position through to settlement. Our Commercial & Business Law team regularly acts on business sales and acquisitions across Victoria, in coordination with our Employment Law and Litigation & Dispute Resolution practices when employee or contract issues require additional specialist input. For business owners thinking further ahead, our article on business succession planning explains how a sale fits into a wider exit strategy, and the Franchising Code of Conduct sets out the additional rules that apply when the business being sold is a franchise.

Conclusion

A business sale is too significant a transaction to approach with a template or a handshake. The agreement determines who bears which risks, what is delivered at settlement, and what recourse each party has if something goes wrong. Sellers and buyers who invest in proper structuring, thorough due diligence, careful drafting and disciplined settlement processes consistently achieve better outcomes — both in the deal they close and in the years that follow.

Frequently Asked Questions