Buying a Café, Restaurant or Retail Business? 7 Legal Issues to Check First

Co-authored by Vishaal Kudupudi

KEY INSIGHTS:

• The purchase price is only part of the deal. Leases, employees, licences, contracts, intellectual property and existing liabilities can all affect the value of a business.

• Due diligence should be completed before signing, not after the transaction has become difficult to unwind.

• Buyers should consider how the business will be operated after settlement, including its company structure, shareholder or partnership arrangements, employment contracts, policies and insurance.

• The sale agreement should clearly set out what is being purchased, what liabilities are being assumed and what must happen before settlement.

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Buying an established café, restaurant or retail business can be an attractive way to enter the market. You may be taking over an existing customer base, premises, equipment, employees and goodwill rather than starting from scratch.

But buying a business is about more than agreeing on a price.

Before signing a contract, buyers should understand what they are actually acquiring, what obligations will come with the business and what risks may remain after settlement.

1. What Exactly Are You Buying?

The first question is simple: what exactly is included in the sale?

A business sale may include goodwill, trading names, equipment, stock, intellectual property, websites, social media accounts, customer databases, supplier arrangements and other business assets.

The buyer should also identify what is not being transferred and whether the seller is retaining any assets, debts or liabilities.

This is particularly important where the business operates through a company. Buying the shares in a company is legally different from buying the assets of a business, and the risks associated with each structure can be very different.

The sale structure should be understood before the contract is signed.

 

2. Can You Stay in the Premises?

For a café, restaurant or retail business, the lease can be just as important as the business itself.

Before committing to the purchase, review:

• the remaining lease term and options;

• rent and rent review provisions;

• permitted use of the premises;

• outgoings;

• repair and maintenance obligations;

• make-good requirements; and

• the landlord’s requirements for assignment.

If the lease needs to be transferred, the transaction should be structured so that the buyer is not left owning a business without secure rights to occupy the premises.

For food businesses, it is also worth checking whether the existing use and approvals are suitable for the way the buyer intends to operate the business.

 

3. What Happens to the Employees?

Employees can be one of the biggest legal issues in a business purchase.

A sale may involve a transfer of business under the Fair Work Act 2009 (Cth). Where the transfer rules apply, the new employer may need to recognise the employee’s previous service for some entitlements, while different rules can apply to annual leave, redundancy, long service leave, notice and unfair dismissal.

Before settlement, buyers should review:

• employment contracts;

• applicable awards or enterprise agreements;

• wages and working arrangements;

• leave balances;

• superannuation;

• workplace policies; and

• any existing employee disputes or claims.

The sale agreement should also clearly address who is responsible for employee entitlements accrued before settlement.

 

4. Are the Licenses, Approvals and Contracts in Order?

A buyer should not assume that everything currently used by the business will simply continue under new ownership.

For cafés and restaurants, this can include food-business notifications, council requirements and liquor licensing.

NSW Food Authority guidance confirms that cafés, restaurants and similar retail food outlets need to notify the relevant local council of their business and food activity details. If the business is being purchased, the notification needs to be made again with the new operator’s details.

If the business sells alcohol, the liquor licence should be dealt with as part of the transaction. NSW allows liquor licences to be transferred when a business is bought or sold, but the required transfer process must be followed and the transfer does not become effective until provisional approval is provided.

Other contracts should also be reviewed, including supplier agreements, equipment leases, software subscriptions, delivery arrangements and customer contracts.

 

5. How Will the Business Be Owned and Operated?

Buying the business is only the beginning. The buyer should also consider how the business will be structured after settlement.

If two or more people are buying the business together, a properly drafted partnership or shareholders agreement can deal with matters such as:

• ownership percentages;

• decision-making;

• financial contributions;

• distribution of profits;

• what happens if one owner wants to leave; and

• what happens if the owners disagree.

 

Where the business is operated through a company, buyers should also ensure the company’s ASIC registration and corporate records are properly established and that directors understand their obligations.

Where appropriate, a director deed or similar arrangement may also be considered to document the relationship between the company and its directors.

These issues are much easier to address before the business is purchased than after a disagreement arises.

 

6. What Intellectual Property and Business Protections Are You Getting?

A successful café, restaurant or retail business may have valuable intellectual property that is not immediately obvious from its physical assets.

This can include the business name, logo, trade marks, website, social media accounts, recipes, branding and other commercial material.

Buyers should establish who actually owns these assets and ensure the sale agreement provides for their transfer where appropriate.

It is also worth reviewing the business’s terms and conditions, privacy documents, refund policies and other policies to determine whether they are suitable for the buyer’s continued operation of the business.

A business may have a strong reputation, but the buyer needs to make sure the legal rights supporting that reputation actually form part of the transaction.

 

7. What Happens If Something Goes Wrong?

Due diligence is important, but the sale agreement itself needs to protect the buyer.

The contract should clearly address matters such as:

1. Seller warranties: what the seller is promising about the business and its assets.

2. Conditions before settlement: such as lease assignment, licence transfer or other required approvals.

3. Employee liabilities: including responsibility for pre-settlement entitlements.

4. Stock and equipment: including how stock is valued and whether equipment is owned, leased or subject to finance.

5. Restraints: whether the seller can immediately open a competing business nearby.

6. Indemnities: who bears responsibility if an identified liability or claim arises.

7. Insurance and asset protection: whether the buyer has appropriate insurance and whether the ownership structure properly protects the buyer’s personal assets.

There may also be NSW transfer duty implications. While duty on most business assets was abolished in 2016, duty can still apply where a business purchase involves dutiable property, including land or an interest in land. Revenue NSW also identifies certain goods, including restaurant tables and chairs and retail cash registers, that may attract duty in particular circumstances.

 

What Should You Do Before Buying a Business?

Before signing a contract, a buyer should consider whether they have:

1. Reviewed the lease and premises arrangements.

2.  Checked the employees, contracts and outstanding entitlements.

3. Confirmed the required licences, approvals and registrations.

4. Identified the assets, intellectual property and contracts being purchased.

5. Considered the appropriate company, partnership or ownership structure.

6. Reviewed insurance, policies and asset-protection arrangements.

7. Obtained legal advice on the sale agreement and the risks of the transaction.

The earlier these issues are identified, the more opportunity there is to negotiate the terms of the deal or walk away before becoming committed.

 

How Can Coutts Help?

Buying a business involves more than transferring money and taking over the keys. The legal structure of the transaction can affect what you own, what liabilities you assume and how well you are protected after settlement.

Coutts Lawyers can assist with business purchases and sales, due diligence, sale-of-business agreements, commercial leases, shareholder and partnership arrangements, employment matters, intellectual property and related commercial issues.

Whether you are buying your first café or acquiring an established retail business, getting legal advice before signing the contract can help identify risks early and give you a clearer understanding of exactly what you are buying.