A purchaser should make a very careful selection of the appropriate entities which will be operating the business. In making this judgment, the following factors are relevant:

Risk

Where the business carries substantial risk, purchasing the business in the name of a company (whether a trading company or a trustee of a trust) will insulate the client’s other assets from those risks.

Capital gains

Individuals generally pay the least tax on capital gains. Accordingly, where the client’s main aim is to make a capital gain from building up and selling the business, the best structure for minimising tax is generally for the business to be purchased in the name of an individual, or in the name of the trust, with individual beneficiaries.

Trading profits

Companies generally pay less tax than individuals on large profits. Purchasing a business in the name of a company or in the name of a trust with a corporate beneficiary may minimise income tax.

Succession planning

In purchasing a business, the principal’s plans for the future ownership of equity in the business should be discussed. Succession planning may be a factor in choosing the entity purchased the business. If the entity running the business is changed later this may incur CGT or stamp duty.

See Choosing the purchaser entity.

Identifying the vendor

When selling a business, it is often necessary to add parties to a contract on the vendor side, in addition to the obvious party operating the business. This can occur in the following circumstances:

Additional owners of assets

Important business assets may be owned by entities other than the party operating the business including:

• Copyright owners. Software, advertising materials or other copyright works may be used as part of a business and the copyright may remain under the ownership of the original authors, including directors of a vendor company.

• Vendor related entities. Other entities controlled by the vendor parties may own assets. For example, a business may be operated by a company, while the business premises are owned by another entity such as a superannuation fund.

Restraint provisions

In most cases, the purchaser will require covenants preventing the vendor from competing with the business after the sale. If such covenants are to be effective, the controllers of the vendor should also be parties to the contract and personally agree to be bound by these provisions.

Guarantees

Where the vendor is a company (other than a large corporation) the purchaser should require that the controllers be joined as parties to the contract and give personal guarantees to the vendor's obligations. The same applies if the vendor is a company operating as the trustee of a trust.

See Identifying the vendor.

Many businesses are conducted by trusts. In these cases, the purchaser’s solicitor must ensure that the business is purchased from the trustee, free from any rights of the beneficiaries of the trust.

A purchaser which acts reasonably in purchasing a business from the trustee will be able to obtain good title, free from any equities, under the doctrine of being a bona fide purchaser for value without notice. Acting reasonably in purchasing the business requires the following:

• An enquiry as to whether the vendor is acting as a trustee. A contractual warranty that there is no trust should give a purchaser sufficient protection.

• If the purchaser becomes aware of the existence of a trust, the trust deed should be checked, to confirm that the vendor is acting within the powers under the deed.

• The Personal Property Security Register. The purchaser will generally take title to the business free from any security interests of which it is not aware, which are not registered on the Personal Property Security Register.

If there is no reason to suspect that the sale would breach the rights of any beneficiary, the purchaser should not be required to take its enquiries any further.

See Buying from a trust.

When purchasing from a company, it is necessary to ensure that:

• the company has a right to sell the business;

• the directors are acting in accordance with the company’s constitution; and

• any registered charges are discharged in full or at least as far as they affect the business.

However, the purchaser can rely upon legal presumptions including:

• The common law. There is a presumption that the acts of an organization have been carried out correctly.

• Corporations Act. Sections 128 , 129 and 1322 of the Corporations Act 2001 (Cth) entitle third parties to assume that officers have been duly appointed, and are acting with the authority of the company.

See Buying from a company.

A franchise business is based on an agreement with a franchisor. Accordingly, selling a franchise requires action on behalf of the franchisor including:

• Consent. The franchisor must give consent, pursuant to s 24–25 of the Franchising Code of Conduct.

• Disclosure. The franchisor must give disclosure pursuant to ss 13–17 of the Franchising Code of Conduct.

• Franchise Agreement. In most cases, the franchisor will require the purchaser of the business to sign a new franchise agreement.

See Buying and selling a franchise.