To do this, buyers need to undertake a thorough “due diligence” of key aspects of the business. Due diligence simply means an investigation. A bit of CSI; but for the business scene. The business sale contract will be made “subject to due diligence” for a specific period of time to allow the buyer to make their investigations and to pull out or re-negotiate if things are not what they expected. As it is impossible to check every singe aspect of the business, it is important to check the key ones. Here is a list of some of the key aspects of a business to consider:

1. Intellectual Property (IP): a business’s IP can be one of its most valuable assets. For this reason, a buyer must ensure that the IP is properly identified, that the seller is in fact the legal owner and that it can be transferred to the buyer without any hassles.
2. Employees: sometimes, a business’s success may rest in the hands of some key workers of the business. If so, this is risky and buyers must take steps to ensure those workers are staying or at the very least, their knowledge is adequately passed on to the buyer.
3. Premises/Lease: when the success of a business is reliant on its location, the lease becomes particularly important. The buyer needs to ensure that the business can be lawfully run from the premises and that the lease allows the buyer to do what it needs to from the premises for a satisfactory period.
4. Licences and Permits: businesses in some industries require specific licences and permits to operate. Otherwise, they can’t operate legally. A buyer needs to check this out for themselves. When there is a requirement, the buyer needs to establish whether the seller has all the licences and permits required to run the businesses, whether they are transferable or whether the buyer can successfully apply for such licences.
5. Customers: if the revenue of the business is generated from some key customers, the agreements with those customers should be looked at carefully. A buyer must understand on what terms they are providing goods or services and determine how easy it is for the customer to end the relationship and therefore the revenue.
6. Suppliers: similarly, if the business is reliant on some key suppliers in order to do business, the arrangements with those suppliers are important.

At the end of the day, the buyer has to be comfortable that they are getting value for money. If they find that things are not as they expected, they will usually have the option of terminating the contract under the due diligence provision in their contract. However, if a buyer discovers something that affects the value of the business and this was not disclosed to them, they have every option to re-negotiate the sale price rather than to end the deal. A buyer should determine what impact their discovery has on the value of the business and seek a reasonable adjustment accordingly. This will normally be handled through the party’s lawyers though it is a good idea to gauge the seller’s business broker first to determine their views. They may also be able to assist with the process.

When it comes to due diligence, your lawyer and financial advisor are equipped to help you determine where to start and what questions to ask or documents to review. This is especially useful if you are buying a business for the first time or if you are new to an industry.

What to do next: If you would like more information on dealing with due diligence, or for all queries regarding buying a business, call Joe Kafrouni on (07) 3354 8888 or email joe@klaw.com.au.

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. You should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

However, it is important to understand that illegality is not just a reference to criminal activity. It is a reference to any activity that the law might prohibit. Some of these prohibitions relate to legitimate businesses doing something illegitimate. If entering into such a contract, the contract will be unenforceable.

For example, in Queensland, the Gaming Machine Act 1991 (Qld), gaming machines cannot be sold or obtained without the necessary licence authority. Any contract to do so would be illegal and unenforceable.

10 Key Issues for Franchise Agreements

In particular, you should consider whether the following key points are satisfactory to you:

1. the assistance you will receive from the franchisor for:
   1. supply of products or services;
   2. branding
   3. marketing;
   4. training;
   5. premises location and fit-out;
   6. computer systems;
   7. other systems;
   8. intellectual property (brand, business name, trade marks)
2. all the fees and payments you are required to pay (in particular, pre-payments, establishment costs and recurring costs) and the manner in which they are calculated;
3. the term (length) of the franchise;
4. your ability to use the branding (i.e. intellectual property) of the franchisor;
5. the territory; what you can do in and out of the territory and what others (including the franchisor) can do in the territory;
6. minimum performance criteria
7. the records you are required to keep and the reports you are required to provide;
8. any prohibition on your ability to undertake any activity during or after the term;
9. the products and services you can sell, must sell or can’t sell and where you must source those products;
10. how the agreement can be terminated by the franchisor and what happens when the agreement ends (e.g. what happens to the good will and who owns the cutomers).

You must ensure that all of these issues are dealt with to your satisfaction. If not, you jeopardise the success of your business.

There are essentially three recognised categories of agreements “subject to contract”:

1. the parties have reached final agreement on the terms of their bargain and intend to be immediately bound, but want those terms to be set out in a more precise, but not materially different form. This category represents a binding agreement;
2. the parties have reached finality and do not intend to alter their agreement, but want to defer performance of it until it has been incorporated into a formal document. This category represents a binding agreement;
3. the parties do not intend to make a concluded bargain unless and until they sign a formal contract. This category represents a non-binding agreement.

Therefore, if an offer is made “subject to contract” (or similar words) care must be taken as it could still be binding on the parties. If an agreement is not meant to be binding, the parties should specifically state, for example: “this agreement is not legally binding on the parties until such time as the parties enter into a formal business sale contract”.

What to do next: If you would like more information from our solicitors on business broker related legal issues or dealing with the legal aspects of business sales, call Joe Kafrouni  on (07) 3354 8888 or email joe@klaw.com.au.

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business brokers and their clients should always consult their own legal advisors to discuss your particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

Consider Issues with your iPhone Application

In addressing the risks of an iPhone application, it is important to consider the potential issues that might arise.  Some applications (e.g. games) will be fairly low risk, while others (e.g. location services) might have serious consequences.

Consider an application incorporating third party location services to track business assets and capturing reference data for field work.   If the location is incorrectly displayed or if assets being tracked are recorded incorrectly, the end user might suffer a loss of time or money.  Also, if the application used a third party’s information (e.g. Google Maps or Open Street Maps) then, depending on what and the extent to which it is being used, a provision in the licence agreement might be required to deal with the use of such third party applications.

Standard End User Licence Agreements

Apple Inc. has a standard End User License Agreement (EULA) that you can adopt as part of the iPhone development approval process.  As license agreements go, the current version covers most of the standard issues.  But because it’s a generally worded document, it does not cater for specific iPhone applications that have their own requirements.  Consequently, you must ensure that your end user licence agreement addresses the potential risks.

If your application incorporates third party location services (e.g. Google Maps), your application’s terms of use may need to ensure that users also agree to be bound by Google’s terms of use, perhaps by incorporating pop-up windows in the application with a link attached.  You may also need to ensure that copyright and trademark notices remain on the third party’s information displayed in the application.

In this regard, you may also need to determine whether you have to keep up-to-date with the third party’s terms of use, which may change over time.  For example, an application that uses third party maps may have a limit to the number of daily downloads, which may reduce over time forcing you to subscribe to a premium service allowing greater downloads.  If you do not keep up-to-date with the terms of your use of the third party application, you could find your application in breach of copyright or a third party’s terms of use.

Conclusion

Businesses must be aware of the potential risks posed by the development and distribution of an iPhone application.  Consider not only the legal relationship between you and the retailer, but also between you and the end user.  Properly drafted licence agreements tailored to the particular circumstances of your iPhone application will help manage the risks arising out of your application.

It could be 65% off a five night, five star holiday in Phuket for $999 or 71% off a fresh seafood basket at a local Brisbane take away shop for $16. A few years on from Groupon’s launch in 2008, group buying by consumers is becoming an everyday consideration for many business owners and consumers. It is now more than just marketing for some businesses that rely on the “Groupons” of the world as their primary, if not sole, source of income. As a result, coupons, vouchers and gift certificates have become a greater consideration when a business is being sold.

Legally, the business owner who sold the coupon is liable to honour that deal, even if they may have sold their business. Therefore, they must take great care to ensure the buyer of their business agrees to honour the deals. But that’s not all. If customer receives poor services or defective goods from the new owner, that could also land the original business owner in trouble. These risks must be addressed by anyone selling a business.

Now let’s consider the buyer’s perspective. If they are going to be responsible for honouring the deals sold by the previous owner, what’s in it for them? Sure they will get people through the door, but at what cost? A buyer should obtain reasonable compensation from the seller for honouring the deals. Also, a buyer must find out what is required to meet the coupon obligations. If profit is not made from honouring the coupon (or even worse, a loss is made) can the buyer actually afford the exercise? If so, the buyer must be careful not to be swamped with customers using coupons at once. The last thing a new business owner wants is a bad reputation for running out of goods or delivering poor service. If this is possible, the value of the business should be discounted to accommodate the risk.

Business owners who provide products and services through the likes of Groupon, and those considering buying such businesses, must carefully consider “coupon risk” when a business is sold. It is recommended they discuss this with their business lawyer before they sign any contract. A failure to do so could cause a nightmare for the new business owner. For the seller, it might mean visiting the local court house instead of Paris!

What to do next: If you would like more information on dealing with coupons, or for all queries regarding business sales and assistance, call Joe Kafrouni or Rob Montes on (07) 3354 8888 or joe@klaw.com.au or rob@klaw.com.au.

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. You should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

In particular, the three critical issues that need to be examined: the multiplier, the retention and the restraint of trade.

The Multiplier                                             

The market value of a rent roll in Australia is usually derived by applying a multiplier to the net property management commission. This is usually the most important issue for a buyer and it will be at the forefront of their mind. There are plenty of factors that need to be considered in determining the Multiplier.

• Ratio – a ratio of one property to one owner is considered to be excellent and most buyers will consider this ratio as extremely important.
• Term – what is the management term of every property? Generally, a property that has been managed for more than five years is a “blue chip” management.
• Location – properties located within 5kms of the office are ideal; those located outside are more costly (time and money) to manage.
• Averages – properties that achieve rents way above or below the average for the area usually have higher levels of vacancy, arrears, repairs and maintenance. High levels of vacancy and arrears are typical of low quality rent rolls.
• House v. Units – some managers consider units more profitable than houses, given that repairs and maintenance are comparably lower as the body corporate manages all external issues involving a unit.
• Condition – obviously the condition of the properties will impact upon the time spent in dealing with repairs and maintenance.
• Payment – the method by which tenants pay rent and statements are sent to owners is important (e.g. the monthly tenant direct-debit-rent bank transfer to owner considered most valuable); other less effective systems have a negative effect on the multiplier.
• Authority – agency agreements that provide limited or no authority to the agent result in time consuming and costly communication with owners on trivial matters.
• Relationships – are there any unusual connections between the seller and the landlords? Such relationships could impact on the loss of managements.

Aside from the factors that determine the multiplier, the buyer will need to properly consider the retention issue, which if not satisfactorily addressed, could undermine the value of the rent-roll business.

The Retention

For a buyer, the purchase of a rent roll is about ensuring that as many of the listings held by the business are transferred to the buyer after settlement. To achieve this objective, the buyer needs to consider the retention issue in order to deal with the fact that not all property managements can be immediately transferred.

Does the contract have a “claw-back” provision, which allows for a deduction from the purchase price in the event there are losses of properties due to a lessor’s authority to manage the property not being transferred to the buyer (referred to as “slippage”)?

The buyer and seller will usually agree on the extent to which the purchase price will be retained in order to deal with slippage. In some case, there might be a significant portion of the moneys withheld.

The most common agreement is a three month retention period with a 10% retention amount. However, the warranty retention period and factor could operate by way of several stages and extended periods of time to ensure that the buyer has plenty of time to transfer managements from the seller or to be compensated for the loss of managements after settlement.

In any case, no buyer should risk everything by entering into a contract without a retention  period and a retention amount. Otherwise, the buyer risks losing managements that they have paid for.

The Restraint of Trade

Even if a buyer does well with the multiplier and the retention moneys, these steps could be undone by the seller capitalising on its goodwill and competing against the buyer, with a view to retaking the managements transferred to the buyer in the sale.

The REIQ contract only includes a restraint of trade by time and geographical area. It does not prevent the seller from canvassing or dealing with existing clients, poaching key staff or disclosing confidential information about the business to a competitor following settlement.

Therefore, it is imperative to protect a buyer’s interest by including a comprehensive restraint of trade clause in the contract that is specific to the needs of the buyer and the professional service business being purchased.

Does the seller intend to continue a real estate agency business? What will be excluded? If the buyer does not satisfactorily address this issue, the value of the rent roll could be seriously undermined.

Conclusion

As there are many issues unique to buying a rent roll business, a buyer or seller should seek the advice of a specialist business lawyer prior to signing a contract to ensure that the contract includes all special conditions necessary to protect their interests.

Without these protections in place, a buyer may find they are unable to operate their rent roll business to its maximum potential.

What to do next: If you would like more information on buying or selling a rent roll or a real estate agency, or for all queries regarding business sales and assistance, call Joe Kafrouni or Rob Montes on (07) 3354 8888 or joe@klaw.com.au or rob@klaw.com.au.

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. You should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

You should not use this Guide as a do-it-yourself tool, because the risks in doing so are extremely high. Every business sale transaction is different and requires the input of professional advisers – typically your lawyer, accountant, finance broker and financial advisor.

Download (PDF, 340.04KB)

Directors must appreciate that they are putting their house (and everything else they own for that matter) on the line when taking on that position. In the case of Darrel Lea, the directors were certainly mindful of their potential personal liability in making the decision to meet with administrators who ultimately put this historical company into administration.

For emphasis, just consider the potential personal liability of a director of Darrel Lea for superannuation alone. It is reported that Darrel Lea had 700 employees. If the Australian Bureau of Statistics is to be believed, an average Australian wage is $55,000 per year. This amounts to an annual wage bill for the company of $38,500,000 a year or $9,625,000 per quarter. The quarterly super bill alone, based on the rate of nine percent of wages, is $866,250. This meant that if the directors of Darrel Lea did not put the company into administration, they would each be potentially liable for almost a million dollars in personal liability, just for superannuation. This is not to mention PAYG and all the other debts being incurred by the company. That’s a lot of chocolate!

In addition to PAYG and super, a company director could be personally liable for all its company’s debts if the company is trading whilst insolvent i.e. the company is incurring debt  whilst unable to pay them when due. Therefore, just like Darrel Lea, a director must stop their company from trading if it is unable to meet its debts. This usually means the company is put into administration of liquidation, a formal legal process.

The question to be posed to ascertain whether a company is insolvent is this: Is the company able to pay all of its debts as and when they become due and payable? To help, company directors should watch out for the following as signs of insolvency:

1. continuing financial losses;
2. bills being paid outside supplier trading terms;
3. tax liabilities not being paid;
4. supply terms being changed to cash on delivery “COD” terms;
5. increasingly receiving letters of demands, solicitors’ letters and legal demands;
6. large number of customers not paying their accounts on time;
7. no up to date and accurate financial information;
8. company cheques being dishonoured;
9. knock-backs on finance applications; and
10. excessive reliance on family members and friends.

Just remember the old saying: “where there is smoke, there’s fire”. As a director, keep your nose clear so you can smell the smoke. If you smell any, investigate. If it’s serious, or if there is any doubt, call your accountant or solicitor for guidance. That call could save you the roof over your head!

What to do next: If you would like more information from our Brisbane solicitors on insolvent trading or company director obligations generally, call Joe Kafrouni or Rob Montes on (07) 3354 8888 or email joe@klaw.com.au or rob@klaw.com.au.

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. You should always consult your own legal advisors to discuss your particular circumstances. KafrouniLawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

Franchisor’s Consent        

Most real estate agencies are franchises, which (in the very least) require the consent of the franchisor to sell the franchise to the buyer. The contract needs to include a special condition allowing time for this to occur and giving the buyer a right to terminate the contract if franchisor consent has not been provided.

Under some franchise agreements, the franchisor may have an option to purchase the business first. This will have to be explored before the agency is publicly offered for sale?

Due Diligence       

Normally most buyers will have ascertained prior to signing the contract whether the business is well situated, has enough parking or ease of access for clients and is close to facilities important to the business; however, the standard REIQ Business Sale Contract only provides a buyer with 10 business days from the date of contract to verify whether the financial accounts of the business are true and correct.  It does not provide the buyer with time to undertake further due diligence such as investigating the businesses goodwill, the licences and accreditations held or required by the business and its employees, or whether the company’s intellectual property is appropriate to the business, transferable or whether the plant and equipment is in good working order.

It is important to note that the goodwill of a real estate agency quite often rests with the reputation of the owner or principal licence holder and key sales agents. Investigation should be undertaken as to whether the owner or principal licence holder or key sales agents have ever been, or are, the subject of a professional or ethical investigation such as for negligence or professional misconduct. Any such charges or investigations could have a detrimental impact on the businesses goodwill, both at the time of sale and in the future.

A special condition to allow a buyer enough time and access to information to ascertain the true value and running requirements of the business is therefore imperative.

Work-in-Progress

Whilst many professional practice fees are charged up-front at each client attendance (such as doctors, dentists and veterinary practices), real estate businesses usually charge a commission with an account only being issued when the work is complete (e.g. settlement of a sale). It is therefore important that a basis for billing and collecting fees for work, which falls over the contract period and after settlement, be inserted into the contract.

In this regard, the standard conditions may not be adequate or may not reflect the parties’ intentions. For example, which party will be entitled to the commission on a sale if a sale contract is signed after the contract of sale for the business? Current listings should be attached to the contract so there is no doubt about the work-in-progress and consideration given to the circumstances in which a buyer will be entitled to the commission on sales.

Licences & Accreditations

A real estate agency requires licencing and accreditation, either for the business or more usually for the principal and its key employees. It is important that these licences and accreditations are in place at settlement (if not before) so that the buyer can begin trading immediately after settlement. It is advisable to make the settlement of the contract subject to obtaining all necessary licences and accreditation by way of a special condition in the contract.

Restraint of Trade

The REIQ contract only includes a restraint of trade by time and geographical area. It does not prevent the seller from canvassing or dealing with existing clients, poaching key staff or disclosing confidential information about the business to a competitor following settlement.

Therefore, it is imperative to protect a buyer’s interest by including a comprehensive restraint of trade clause in the contract that is specific to the needs of the buyer and the professional service business being purchased.

Software

Software can be crucial to the operation of a professional service business. It is therefore important to ascertain whether:

• the software is still available;
• the software is suitable or adequate for the purpose of the business;
• the software is up-to-date and the provider is updating it at least annually (this is especially important with accounting programs updating tax tables);
• the software can be transferred or a licence can be purchased without loss of existing client data; and
• the software will run on the buyer’s current computer equipment (if not purchasing seller’s computer equipment) and will continue to do so if the buyer upgrades its computer hardware in the near future.

These investigations would no doubt be undertaken during the due diligence period. However, it is advisable to make settlement of the contract conditional upon the transfer or purchase of a licence to run the software to ensure that all client information can be accessed from the day of settlement.

Rent Roll

If you are also buying a rent roll as part of the agency, please also see our article on buying a rent roll: http://www.klaw.com.au/news/?p=1246.

Conclusion

As there are many issues unique to buying a real estate business, a buyer or seller should seek the advice of a specialist business lawyer prior to signing a contract to ensure that the contract includes all special conditions necessary to protect their interests. Without these protections in place, a buyer may find they are unable to run their new business properly, or at all, following settlement.

What to do next: If you would like more information on buying or selling a real estate agency, or for all queries regarding business sales and assistance, call Joe Kafrouni or Rob Montes on (07) 3354 8888 or joe@klaw.com.au or rob@klaw.com.au.

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. You should always consult their own legal advisors to discuss their particular circumstances. KafrouniLawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.