The Business of Business – The Settlement Process
Settling a business purchase is like settling a house purchase – it’s complicated, drawn out and needs a lawyer.
Not just any lawyer, but someone who has expertise in commercial business. There are a tonne of specific forms and lodgements that need to be completed when transferring a business and if you miss one of them, then you don’t legally own your entity and can find yourself thrown out of the premises.
I’m not even going to try to list all of the requirements, because it’s beyond my paygrade, but what I can give you is an overview of the type of stress you will be under and the things you need to have in place to complete the purchase.
Due diligence by the landlord will probably send you around the twist first. This is the most frustrating part of the whole exercise but one you must pass. It’s not like a house lease – at all. A business lease is treacherous and the landlord and their lawyer will send you to hell and back in papework.
You will need to have an accountant who can verify ALL YOUR FINANCIALS. You will need to show that you can pay the rent without any business going on for at least a month – but most likely more. An accountant will have to sign off on your audited financial statements, bank statements and will then have to sign one of the dreaded forms which goes to the landlord.
You will need 3 references from people in business or who can vouch for your outstanding and upstanding citizenship of the world.
You will need a business plan and cash flow projections.
You will need a bank guarantee. A bank guarantee is basically like a bond but it has special rules. It is the amount that the landlord deems fit but is usually 3 months rent which is held at the bank. This thing will give you a heart attack. Once you find the money and then put it into a term deposit, it’s not yours anymore. Technically it’s cash that the landlord can get at any time they want. Generally they won’t action it unless you default on rent, but know that they can get it any time they like.
You will be left hanging by the landlord as to whether you have been approved for the lease or not. Depending on who the landlord is, a company or individual, or an individual with a company structure, it may be months before you find out that you have been the successful tenant. This is generally because commercial real estate agents want to make sure they have the best deal for the premises and do not want to get stuck with a business that will fail or unreliable tenant.
If you are working one on one with a landlord through the current business owner, again, their time is usually more precious than yours and they can keep you waiting for a long time.
When I settled mine, I didn’t get final approval from the landlord until 2 days prior to settlement date with the current business owner. In frustration I nearly called the whole thing off, and in retrospect this was probably the universe telling me not to do it, but I did and we all know what happened.
So learn from that mistake as well – if there are unreasonable delays – if there is a niggling feeling in your gut – if something doesn’t seem right – if the landlord or the lawyer are inept or conversely super detail orientated – beware my friends and think again about your proposal.
Settlement takes a long time and even with the finest commercial lawyer, we still missed a bit of paper which meant I wasn’t officially the owner until after I had already lost the business – so there was that as well.
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