Buying a Business: A Buyer's Guide to navigating the purchase

Business Law: 27 May 2025

Author: Leisa Bayston - Our People

As a buyer, your primary concern is ensuring you get exactly what you're paying for – no nasty surprises, no hidden liabilities, and a smooth transition that preserves the business value you're acquiring. Here's what every prospective buyer needs to know about the purchase process.

Term Sheet

A terms sheet will set out at a high level the key terms of a transaction – price (or means of valuing the price), whether share or asset sale, deposit, any exclusivity fee, apportionment of employee entitlements and conditions precedent.

The idea is that the parties align on these key terms before substantive transaction documents are prepared. This helps test whether there is a sufficient meeting of minds between the parties. It can reduce the costs of going back‑and‑forth on rounds of amendments of the transaction documents which can become unnecessarily complicated, we always advise against negotiation by drafting.

A term sheet is not compulsory, however, it can play an important role in most transactions, particularly those of any real size.

We would usually recommend that a term sheet be non‑binding, save for confidentiality, exclusivity or other similar clauses. This ensures that they are not locked into a position in case there is a material change in circumstances (e.g. price agreed, but serious issues uncovered during due diligence). However, generally speaking the transaction documents are prepared with the Terms Sheet as the basis, so guard rails are in place in relation to important issues.

Due Diligence: Your First Line of Defence

Due diligence is arguably the most critical phase of any business purchase. This comprehensive review process ensures the business is exactly as described and promised by the seller.

Your due diligence should cover multiple areas, including:

• financial statements,
• ownership and condition of business assets;
• intellectual property provenance;
• contracts with key suppliers, leases, licenses, any litigation (actual or threatened), and
• employees and employment disputes, and occupational health and safety compliance.

For technology-driven businesses, intellectual property due diligence deserves special attention. You need to verify ownership or defensible usage rights to all IP assets.

The outcome of due diligence will determine whether you proceed with the purchase.

 Critical issues may cause you to walk away entirely, while lesser issues might justify a reduced purchase price or additional warranties and conditions.

Asset sale vs Share sale:

Your risk profile is significantly impacted by the structure of your purchase.

A share sale means you're purchasing all shares in the company, thereby inheriting all liabilities – including unpaid taxes, unknown debts, and other potential "skeletons in the closet." While this structure can be simpler for asset transfer, it's inherently riskier and requires strong warranties and security from the seller.

An asset sale, where you purchase specific assets and goodwill while starting with a clean corporate structure generally reduces your risk. The seller remains responsible for pre-completion liabilities, while you take on post-completion obligations.

However, this structure can require more work to transfer assets, assign leases and contracts, and managing employee transitions.

Securing clear title

As a buyer, you need absolute certainty about what you're acquiring. This means ensuring clear title to all assets or shares, free from encumbrances like PPSR security interests. You'll want mechanisms to manage stock levels in asset sales and assurance about the sufficiency and totality of what you're purchasing.

Restraints on the seller and key personnel are typically included. After all, you're likely buying from someone with the skills and expertise to operate a competitive business. While you'll want broad restraints, remember they must be reasonable and related to legitimate business interests to be enforceable.

Managing payment terms and Security

Favourable payment terms are often negotiated, these include deferred payment arrangements or vendor finance.

We recommend that where possible you avoid providing personal guarantees. Where you intend to rely on trading profits to fund the purchase price you should speak to your accountant to ensure your expectations are reasonable.

Conditions Precedent: Your Safety Net

Conditions precedent are requirements that must be satisfied before completion, typically for your benefit.

These might include:

• obtaining finance;
• securing releases of PPSR security interests;
• obtaining consents for lease or contract assignments;
• securing employment contracts with key employees.

If conditions precedent can't be satisfied, neither party is required to proceed.

Warranties: your Insurance policy

Warranties are promises made by each party, with the seller's warranties about the business being most critical.

You want comprehensive warranties as they provide recourse if the business isn't as described. However, understand that warranties interact with due diligence – they essentially ask the seller to stand behind what was disclosed.

The seller will likely want to negotiate limitation on warranties, including amount, time and also rule things out – for example consequential loss.

What you can and should agree to will depend on the results of your due diligence process and the facts of each circumstance. An experienced adviser can add real value here – making sure the contract protects you to the extent appropriate.

Consider whether you need security arrangements like personal guarantees from seller directors or escrow arrangements to ensure funds are available if warranty claims become necessary. Remember that sellers may have limited assets after disposing of their business, making recovery difficult without proper security arrangements.

Post-Completion Vigilance

Monitor the business for any issues that might constitute warranty breaches, keeping in mind time limits for bringing claims.

If you have restraints of trade in the transaction documents then you should keep alert to any breaches of these by the seller.

The Bottom Line

Successful business purchase requires meticulous preparation, comprehensive due diligence, and robust legal protections.

While the process can seem daunting, proper planning and professional guidance can help ensure you acquire exactly what you expect to buy, at a fair price, with adequate protection against unforeseen issues. The key is never to rush – thorough preparation now can save significant problems and costs later.

Whether you’re a buyer or a seller, if you have any questions, please contact Aitken Partners’ experienced and friendly Commercial Law Team on (03) 8600 6000 to discuss your options.