Buying a Business in Victoria: A Complete Legal Guide

Buying shares versus buying business assets

The first and most consequential structural decision is whether to buy the shares in the company that owns the business, or buy the business assets directly from that company. The two structures are fundamentally different in their legal consequences, tax treatment and risk profile.

Asset sale

On an asset sale, the buyer (or its purchasing entity) acquires the individual assets of the business — plant and equipment, stock, goodwill, intellectual property, contracts, leases and (subject to employee consent) staff. The selling company remains in existence after the sale, owns the proceeds and is responsible for its historical tax, employee and other liabilities.

The defining features of an asset sale are:

• Cherry-picking. The buyer chooses which assets and contracts to take and which to leave behind. Assets that are not specified do not transfer.
• Limited inheritance of liabilities.Historical liabilities of the company (tax disputes, warranty claims, litigation, environmental contamination, underpayments) generally stay with the seller.
• Consents required. Each customer contract, supplier contract and lease must be assigned with the counterparty's consent — sometimes a substantial project in its own right.
• Employee transfer. Employees do not automatically transfer. The seller ends each employment and the buyer makes a new offer.

Share sale

On a share sale, the buyer acquires the shares in the company. Because the company is the legal owner of the business, everything inside it — assets, contracts, leases, licences, employees and liabilities — continues uninterrupted. Only the ownership of the shares changes.

The defining features of a share sale are:

• Continuity. Customers, suppliers, landlords, employees and most regulators do not need to consent to the change of ownership, although change of control clauses in contracts may still need to be addressed.
• Inheritance of all liabilities. The buyer inherits everything in the company — known and unknown. This is the biggest single reason buyers prefer asset sales.
• Tax treatment. The seller may access capital gains tax discounts and small business CGT concessions on a share sale that are not available on an asset sale. Buyers do not get a stepped-up cost base in the underlying assets, which can affect future depreciation.
• Stamp duty. A share sale is not subject to land transfer duty in Victoria, but landholder duty can apply where the company holds Victorian land above the relevant threshold.

Most SME transactions in Victoria are structured as asset sales because buyers are unwilling to inherit unquantified historical risk. Share sales are more common where contracts, licences or regulatory permissions cannot readily be transferred (some health, transport and financial services businesses fall into this category) or where the seller insists on a share sale to access CGT concessions. The choice of structure should be modelled with the buyer's lawyer and accountant before any commercial terms are agreed.

Due diligence

Due diligence is the disciplined process of independently verifying what you are buying before you are bound to buy it. Its purpose is to confirm that the business is what the seller represents it to be, to identify risks that need to be addressed in the contract, and to surface issues that may justify a price reduction or termination of negotiations.

Scope should be proportionate to the price and risk. A $200,000 cafe purchase does not warrant the same diligence workstream as a $5 million distribution business — but neither can sensibly be bought without verifying the headline numbers and major contracts. A simple due diligence covers:

• Financial. Last three years of financial statements, current-year management accounts, tax returns, BAS lodgements, debtors and creditors ageing reports, bank statements and a normalised earnings calculation.
• Legal. Corporate structure, customer contracts, supplier contracts, lease, equipment finance, loan documents, intellectual property, employee files, awards, enterprise agreements, regulatory notices and any current or threatened litigation.
• Commercial. Customer concentration, supplier dependency, key person risk, market position, competitive threats and growth assumptions in any forecast.
• Technology and data. Software licences, cloud subscriptions, data ownership, cyber security posture and the practical IT handover plan.

Due diligence is usually run in a virtual data room. Buyers' advisers issue an information request list, review responses and ask follow-up questions in writing so the trail is preserved. Outputs feed directly into the warranty schedule, the disclosure letter and the special conditions of the contract.

Confidentiality agreements

A confidentiality agreement (also called a non-disclosure agreement or NDA) is the first document in almost every business sale. It should be signed before the seller releases any meaningful financial or operational information, and definitely before staff or customers are informed of the sale process.

A robust NDA covers:

• the fact that discussions are taking place;
• the information disclosed by the seller;
• restrictions on solicitation of staff and customers;
• permitted disclosures to the buyer's professional advisers, financiers and (with consent) prospective investors;
• return or destruction of information at the end of negotiations; and
• a use restriction — the information may only be used for the purpose of evaluating the acquisition.

Both sides should sign. Where the seller is a company, the principal individuals should also sign personally so the obligations are enforceable against the people who actually hold the knowledge.

Heads of Agreement

A Heads of Agreement (sometimes called a term sheet, letter of intent or memorandum of understanding) records the principal commercial terms agreed in principle. It is the bridge between handshake negotiation and binding contract.

A typical Heads of Agreement covers:

• the parties and the target business;
• the purchase price, deposit and any earn-out or retention;
• structure — asset versus share, and the purchasing entity;
• treatment of working capital, stock and debtors;
• conditions to settlement (finance, due diligence, landlord consent, licence transfers);
• exclusivity and standstill;
• confidentiality and announcements;
• restraint of trade;
• timetable to a binding contract and to settlement; and
• costs.

Most clauses in a Heads of Agreement are intended to be non-binding indications of the parties' intentions, with specific clauses — typically confidentiality, exclusivity, costs and governing law — expressed to be binding. Whether the document overall is binding depends on the words used and the parties' conduct. The High Court in Masters v Cameron identified categories that still apply today. A Heads of Agreement should always be reviewed by a lawyer before signing.

Business valuation

Most small and medium businesses in Victoria are valued using one of three methods, or a blend of them:

• Multiple of maintainable earnings. Normalised EBITDA or EBIT is multiplied by an industry and risk-adjusted multiple. Owner-operator businesses commonly trade at 1.5 to 3 times normalised earnings; larger, scalable or recurring-revenue businesses attract significantly higher multiples.
• Discounted cash flow. Forecast cash flows are discounted back to a present value at a rate that reflects the cost of capital and risk. Used for larger businesses and for forecasts that diverge meaningfully from history.
• Net asset / sum of the parts. Used for asset-heavy businesses, businesses being wound down, or businesses where goodwill is limited.

Normalisation matters more than the multiple. A buyer should adjust reported earnings for owner salaries above or below market, related-party rent, non-recurring items, COVID-era subsidies and any other items that distort sustainable earnings. The buyer's accountant typically leads this work, with the buyer's lawyer reviewing the contract mechanics for working capital and completion accounts that flow from the normalisation.

Financial due diligence

Financial due diligence focuses on the numbers — what is the quality of earnings the buyer is paying for, what is the working capital actually required to run the business, and what debt-like items reduce equity value. A typical scope covers:

• three years of audited or reviewed accounts and current-year management accounts;
• normalised EBITDA bridge from reported to maintainable;
• customer concentration and revenue recurrence;
• working-capital trends and the normalised working-capital level to be delivered at settlement;
• debt and debt-like items (bank debt, equipment finance, customer deposits, employee entitlements);
• tax position — historical compliance, contingent liabilities, ATO disputes;
• cash flow seasonality; and
• capital expenditure required to maintain the business.

Findings are fed into the price adjustment mechanism, settlement adjustments and warranties. A common output is a target working-capital figure that the seller must deliver at settlement, with a true-up against actual working capital determined by completion accounts in the weeks following.

Legal due diligence

Legal due diligence focuses on the documents and obligations behind the business. The lawyer's role is to identify legal risks and to recommend how they should be addressed in the contract — through conditions, warranties, indemnities, price adjustments, retention or, in serious cases, walking away.

A typical legal due diligence covers:

• Corporate. Constitution, share register, ASIC extracts, officeholders, related-party loans and shareholder agreements.
• Title to assets. Ownership of plant, equipment, intellectual property, domain names and any registered designs or trade marks.
• Contracts. Customer contracts, supplier contracts, distribution agreements, agency agreements, franchise agreements, joint ventures and any change-of- control or termination rights.
• Premises. Lease, sub-leases, licences to occupy, registered or unregistered side arrangements, outgoings, options and bank guarantees.
• Employees. Awards, enterprise agreements, employment contracts, casual conversion, superannuation, accrued leave, contractor arrangements and any current investigations or disputes. Our workplace investigations in Victoria guide covers the most common employee risk that diligence uncovers.
• Regulatory. Licences, permits, registrations and any current or threatened regulator action.
• Litigation and disputes. Current proceedings, threatened claims, recent settlements and demand correspondence. Our guide on letters of demand and resolving business disputes before court both surface the type of issues that should be quantified during diligence.
• Insurance. Policies, claims history, uninsured exposures and policies that need to be replaced on completion.
• Privacy and data. Privacy compliance, data holdings, customer data ownership and any prior data-breach notifications.

Employment issues

Employees are usually the most valuable asset of a services business and the most heavily regulated area of diligence. On an asset sale, the seller ends each employee's employment at completion (with notice or payment in lieu) and the buyer offers new employment on terms that are substantially the same or more favourable.

Under Part 2-8 of the Fair Work Act 2009 (Cth), a 'transfer of business' between non-associated entities transfers accrued service for redundancy, notice and personal/carer's leave purposes unless the buyer notifies otherwise in advance. Annual leave is typically paid out by the seller at completion and the buyer's annual leave entitlement starts again, although the parties commonly negotiate for the buyer to assume the entitlement with a corresponding price adjustment.

Other employment workstreams include:

• identifying any employees on individual contracts that bind the company beyond settlement;
• confirming superannuation compliance and the absence of any 'super guarantee charge' exposure;
• reviewing contractor arrangements for sham contracting risk;
• identifying any restraints on key employees the buyer wants to enforce;
• handling key employees with retention or stay bonuses; and
• communicating with employees in a planned, sensitive sequence — usually after exchange but before settlement.

Customer and supplier contracts

Customer and supplier contracts are the revenue engine of the business. The buyer's lawyer should map every material contract and identify the change-of-control and assignment positions:

• No restriction. The contract can be assigned without consent. The buyer simply needs the seller's written assignment at settlement.
• Consent required. The counterparty's consent is required and may be conditional on commercial concessions. Approach early.
• Termination right on change of control. The counterparty can terminate if control of the seller changes — relevant on a share sale even though the contract itself is unchanged.
• Tender or re-pricing. Government and large corporate contracts often require a re-tender or re-pricing on change of supplier. This can be the single largest risk in an SME business sale.

Where consent cannot reliably be obtained before settlement, the contract should provide for the seller to continue performing the contract for the buyer's benefit (a 'back-to-back' or sub-contract arrangement) until consent is given.

Lease assignment

Premises are usually one of the more complex parts of an SME business sale. On an asset sale, the existing lease must be assigned from the seller to the buyer with the landlord's consent. The landlord almost always requires the buyer to satisfy reasonable financial and experience criteria, sign a deed of assignment or new lease, and provide a bank guarantee or personal guarantees.

The Retail Leases Act 2003 (Vic) imposes additional process and disclosure obligations on the landlord and outgoing tenant where the premises are retail premises. The outgoing tenant must give an assignor's disclosure statement and the landlord must give the buyer an updated disclosure statement. There are short statutory timeframes, and consequences for non-compliance.

Lease assignment is one of the most common bottlenecks in SME business sales. It should be raised with the landlord as soon as the Heads of Agreement is signed — and preferably included as a condition precedent to settlement. Where the existing lease is short, the buyer should consider negotiating a new lease with options that properly reflect the buyer's investment horizon.

Intellectual property

Intellectual property assets are often understated in financial accounts but central to value. Diligence should confirm ownership and identify any gaps:

• Business names and trade marks. Confirm ownership of registered marks and identify any unregistered marks worth protecting.
• Domain names and social media accounts. Confirm registrant details and arrange for transfer of registrar accounts on settlement.
• Copyright. Ownership of website content, marketing materials, software code and design documents — particularly where contractors created them.
• Software. Licences for off-the-shelf software, SaaS subscriptions and any bespoke software developed for the business.
• Know-how and trade secrets. Customer lists, supplier pricing, formulations, processes — protected by confidentiality obligations and (where appropriate) post-completion restraints on the seller.
• Patents and designs. Less common in SME but where present, must be formally assigned.

Each IP class has its own transfer mechanism. Trade marks are assigned by deed and recorded with IP Australia. Domain names are transferred between registrars. Social accounts often require administrator handover on the platform. The buyer's lawyer should produce a single IP transfer schedule and confirm each item at settlement.

PPSR searches

The Personal Property Securities Register is the national register of security interests in personal property (everything other than land). PPSR searches against the seller, the seller's company, related entities and any relevant ABN or ACN will reveal registered security interests over the assets you are buying — bank security, equipment finance, retention of title arrangements, general security agreements and so on.

Buying business assets that remain subject to registered security is one of the most expensive mistakes a buyer can make. The contract should require:

• full disclosure of all registered and unregistered security interests in the disclosure letter;
• discharge or partial release of all registrations relating to the purchased assets at or before settlement, with payout letters provided in advance; and
• warranties from the seller that the assets are sold free of encumbrance.

On settlement day, the buyer's lawyer re-runs PPSR searches to confirm that each release has been registered. For more on the register itself, see our PPSR explained guide.

Licences and permits

Whether the business can lawfully be operated by the buyer depends entirely on the industry. Common Victorian licensing regimes include:

• Hospitality. Liquor licences under the Liquor Control Reform Act 1998 (Vic), food premises registration with the local council, and (in some cases) gaming or late-trading permits.
• Trades and construction. Registered building practitioner status under the Building Act 1993 (Vic), plumbing and electrical licences, and asbestos removal licences.
• Health and childcare. Premises registration, practitioner registrations, NDIS provider registration and education and care service approvals.
• Transport and logistics. Heavy vehicle accreditation, dangerous goods licences and taxi/hire car permits.
• Financial services. Australian Financial Services Licence (AFSL), credit licence (ACL), tax agent and BAS agent registrations.

Each licence has its own transfer process. Some transfer with the business, some require a new application from the buyer, and some cannot be transferred at all. The licence position should be mapped before signing, and any licence application that has long lead times should be a condition precedent to settlement.

GST and going concern

GST commonly applies to the sale of a business unless the sale qualifies as the supply of a going concern under section 38-325 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth), in which case it is GST-free.

To qualify, all of the following must be true:

• both parties are registered for GST;
• the sale is for consideration;
• the supplier supplies to the recipient everything necessary for the continued operation of the business; and
• the supplier and recipient have agreed in writing, on or before the day of supply, that the supply is of a going concern.

If any of those conditions is not met, the buyer pays GST on top of the purchase price and claims an input tax credit in its next BAS — a working-capital cost that should not be overlooked.

The contract should clearly identify the going-concern treatment, allocate risk if the ATO subsequently rules otherwise, and (for an asset sale) allocate the price across the different asset classes for tax purposes. The buyer's accountant should be involved in the GST and structuring before the contract is signed.

Stamp duty considerations

Stamp duty (now called land transfer duty in Victoria) applies to the transfer of land and certain other dutiable property. The landscape for a business acquisition is:

• Pure asset sale, no land. Not dutiable in Victoria — Victoria abolished general duty on business assets in 2012. Duty can still apply to specific items such as motor vehicles transferred with the business.
• Asset sale including land. Land transfer duty applies on the land component at the normal rates.
• Share sale of a landholding company. Landholder duty under Part 2 of the Duties Act 2000 (Vic) can apply where the company holds Victorian land above the threshold and the buyer acquires a 'significant interest'.

For the broader Victorian duty position on land transactions, see our buying commercial property in Victoria guide. Duty should be modelled before signing — the answer can move the economics of a transaction meaningfully.

Restraint of trade clauses

A restraint of trade clause prevents the seller from competing with the business they have just sold for a defined period of time, within a defined geographic area, and in respect of defined activities. Restraints in a sale-of-business context are more readily enforced by Australian courts than employment restraints, because the buyer has paid for the goodwill of the business and the common law recognises that goodwill needs protection.

The drafting issues that matter most are:

• Cascading periods and radii. Multiple alternative durations (e.g. 5, 3, 2 years) and radii (e.g. 50 km, 25 km, 10 km) so a court can sever the broadest combinations if they are unenforceable and still enforce a narrower combination.
• Scope of restrained activities. Defined by reference to the actual business at the date of completion — not the seller's whole industry.
• Non-solicit of customers, suppliers and staff. Typically separate clauses with their own durations.
• Confidentiality and intellectual property. Standalone obligations independent of the restraint period.
• Connected persons. Restraints should bind not only the legal seller but also the individuals and related entities behind it.

Restraints are reviewed in light of the consideration paid. A modest restraint after a $200,000 sale is different from a five-year national restraint after a $20 million sale.

Vendor warranties

Warranties are the buyer's primary post-settlement remedy. They are contractual statements by the seller about the state of the business at signing and at settlement. If a warranty turns out to be wrong, the buyer can claim damages — subject to the negotiated caps, time limits and thresholds.

Standard warranty categories include:

• Title and capacity. The seller owns the assets/shares and has authority to sell.
• Financial information. The accounts give a true and fair view; there have been no material adverse changes since the last accounts date.
• Compliance. The business complies with applicable laws and no regulator action is pending.
• Tax. All returns lodged and tax paid; no current audit or dispute.
• Employees. Entitlements correctly calculated and accrued.
• Contracts. Disclosed contracts are in full force, no defaults, no termination notices.
• Litigation. No current, pending or threatened litigation other than as disclosed.
• Intellectual property. Owned by the seller and not the subject of infringement claims.
• Assets. Free of encumbrance other than as disclosed.
• Environment. No contamination or notices.

Each warranty is normally qualified by a disclosure letter — specific matters disclosed before signing that 'fairly disclose' the relevant facts and so prevent a later claim. Warranties are also limited by:

• Caps. Most commonly the purchase price for title and tax warranties; a percentage (often 25% to 100%) for general warranties.
• Time limits. Often 18 to 24 months for general warranties; up to 7 years for tax warranties.
• De minimis and basket. Individual claims must exceed a small threshold; aggregate claims must exceed a larger threshold before any claim can be made.
• Notice requirements. Strict procedures for notifying claims.

Warranties are negotiated heavily because they are the buyer's principal post-settlement protection. A seller who pushes back on standard warranties is often signalling that there is something to disclose.

Settlement process

Settlement is the day the buyer pays the balance of the purchase price and the seller transfers the business. The mechanics depend on whether the deal is a share or asset sale, the size of the deposit, the use of escrow or retention, and the technology used for exchange.

A typical SME settlement involves:

• final PPSR searches and the discharge of registered security;
• execution and delivery of the deed of assignment for each material contract;
• execution and delivery of the deed of assignment of lease (with landlord consent);
• execution and delivery of intellectual property assignments;
• transfer of shares (on a share sale) and updated ASIC notifications;
• employee documentation — termination letters, new offers, signed acceptances and acknowledgements;
• payment of the balance of the price (with adjustments for working capital, stock, debtors and any agreed pre-completion items);
• release of bank guarantees and substitution of the buyer's bank guarantee to the landlord;
• handover of physical assets, keys, passwords, customer files and records; and
• a written settlement statement reconciling the price, deposit, adjustments and balance paid.

Many settlements are now conducted electronically — funds move by EFT or RTGS, documents are exchanged via DocuSign or PEXA, and the parties hold a short settlement call. Larger transactions retain a face-to-face settlement meeting because of the volume of documents.

Post-settlement obligations

The work does not end at settlement. A well-run buyer runs the same post-settlement checklist on every acquisition. Typical items include:

• notify customers and suppliers — with messaging coordinated with the seller;
• transfer or apply for licences and permits;
• transfer utilities, insurances and merchant facilities;
• update ASIC and ATO registrations (including BAS, PAYG and superannuation);
• register new PPSR interests over financed equipment and customer retention of title;
• complete lease-assignment formalities and lodge any required notifications;
• complete employee onboarding — payroll setup, super choice forms, induction;
• complete the stocktake and working-capital adjustment within the agreed window;
• issue completion accounts and resolve any disputes about the final purchase price;
• pay out retention or escrow at the agreed time;
• file the duty return (where applicable) within the statutory time; and
• schedule the first warranty review at the 12-month mark so any claims are notified before the clock runs out.

Common mistakes

The same mistakes recur in SME acquisitions across every industry. The most expensive are:

• Paying based on tax returns. Tax returns are optimised to minimise tax, not to display sustainable earnings. Pay based on normalised EBITDA.
• Ignoring customer concentration. Where a single customer is 30% or more of revenue, the price should reflect the risk and the customer relationship should be tested before signing.
• Relying on the seller's word about lease assignment. Approach the landlord early.
• Weak warranties. Accepting low caps, short time limits or broad disclosure carve-outs to 'get the deal done' is regretted later.
• Missing PPSR registrations. Assets bought 'subject to' registered security are not yours.
• Missing licences. Operating without a transferred or fresh licence is the fastest way to lose the business you just bought.
• Misjudging GST or duty. Both can move settlement funds by hundreds of thousands of dollars.
• Underestimating working capital. The price plus the day-one working capital is the real cost of acquisition.
• Underestimating the seller's role. If the seller is the business, plan for the handover and lock in a transition services arrangement.
• Signing a Heads of Agreement without legal advice. Commercial terms set at this stage are difficult to re-open later.

Practical buyer checklist

A short checklist for a buyer at the start of the process — to be expanded with industry-specific items:

1. Confirm purchasing entity (company / trust / partnership) and structure with lawyer and accountant.
2. Sign confidentiality agreement before any data is shared.
3. Agree Heads of Agreement covering price, structure, exclusivity, conditions, restraint, employees and lease.
4. Issue the due diligence information request and open a virtual data room.
5. Engage accountant on financial due diligence and tax structuring.
6. Run PPSR searches against seller, company and related entities.
7. Map customer and supplier contracts; identify consents required.
8. Engage with landlord on lease assignment or new lease.
9. Map licences and permits; commence transfer or new applications.
10. Confirm GST treatment (going concern or otherwise) and document in contract.
11. Negotiate sale contract, disclosure letter, restraint and warranties.
12. Plan employee communications and execute on the agreed date.
13. Hold settlement; re-run PPSR; receive signed transfers and assignments.
14. Execute the post-settlement checklist.
15. Diarise the warranty time limits and the retention or escrow release date.

When legal advice should be obtained

Legal advice should be obtained before signing a Heads of Agreement, not afterwards. The commercial terms recorded in a Heads of Agreement frame the binding contract that follows, and re-opening them is difficult once expectations are set.

Specific stages where a lawyer adds the most value are:

• Structuring. Share versus asset, purchasing entity, GST and duty modelling.
• Confidentiality agreement. Before any data is shared.
• Heads of Agreement. Before signing — to identify clauses that are binding versus non-binding, and to negotiate commercial terms that will be hard to change later.
• Due diligence. Running the legal workstream and translating findings into contract protections.
• Sale contract. Negotiating warranties, disclosure, restraints, conditions and the price adjustment mechanism.
• Lease and contracts. Managing landlord consent, change-of-control and assignment.
• Settlement. Coordinating the document exchange, PPSR releases and money movement.
• Post-settlement. Completion accounts, retention release and warranty claims management.

How Parke Lawyers can help

Parke Lawyers advises Victorian buyers on business and company acquisitions across a broad range of industries — from sole-trader buy-outs to mid-market private company transactions. We work with the buyer's accountant on structure, run the legal workstream of due diligence, negotiate the sale contract and ancillary documents, coordinate landlord consent and settlement, and assist with post-settlement integration and any warranty issues that emerge.

For the legal services that sit behind this guide, see our commercial and business law service page. The matter would typically be led by Jim Parke, Lawyer & Chartered Accountant, drawing on the firm's commercial, employment and property experience as the transaction requires.

Frequently Asked Questions