Eight Key Issues with Hospitality Business Sales

Posted 30-09-2020
Written by admin 101

When selling any hospitality business, be it a café, restaurant, bar or venue, it's important to document the sale correctly using a well drafted Business Sale Agreement. RMB Lawyers Commercial Lawyer PAUL BARTHOLOMEW list eight common issues:

The premises
Usually a hospitality business will operate from leased premises and the purchaser will want to ensure the lease can be transferred upon the sale of the business.  If the lease is expired, a new one will need to be granted by the landlord to the purchaser.

Taking steps to liaise with the landlord prior to the sale process, to understand their expectations, can assist in streamlining your sale.  The last thing you want is the sale of your business to be delayed or worse, fall through, for want of the landlord’s consent to a new lease.  Considering your options early and discussing it with your lawyer may affect how you structure the sale.

Any licence that you have which is relevant to the operation of your business should typically be included in the sale.  For example, a small bar may be of little worth to an incoming purchaser if the associated liquor licence is not included.

A Business Sale Agreement should include terms where the approval of the grant or transfer of a liquor licence is a precondition to settlement.  In order to ensure the issue is appropriately dealt with, you will need to have a full understanding your liquor licence and other licences to include with a Business Sale Agreement.

Depending on the purchaser, your existing employees may either remain with the business or their employment may end with the sale of the business. For many vendors, this is a decision that affects their choice of purchaser, as many vendors have longstanding relationships with their employees and wish to see their employment continue.

When considering the impact of a sale on your employees, it is helpful to understand that full-time and part-time employees have different considerations to casual employees.

If a full-time or part-time employee is to remain employed by the business following its sale, you need to consider the entitlements those employees have.  An adjustment at the time that settlement occurs that takes into account any outstanding entitlements owed to these employees.  If the incoming purchaser does not wish to recognise all of the employee’s entitlements and length of service, then redundancy payments may be required.

For casual employees, their employment with you typically ceases upon their last shift prior to the sale of the business, at which point they are then reemployed as a casual staff member by the purchaser of the business, should they wish to retain the services of the employee.

It is important to understand any notice of termination periods that apply to both permanent and casual employees.  Your lawyer can assist you with this.

Business assets
Over the course of running your hospitality business, it is quite possible that you have acquired many valuable items including the venue fit out, commercial kitchens, refrigeration, point of sale technology, delivery vehicles and alike.

Other non-tangible but valuable assets include your business name, website, social media accounts, and telephone numbers.

You will need to consider exactly what items you wish to include in the sale.  It is best to have all items of equipment listed in an inventory so it is clear what you will be providing to the purchaser as part of the sale.  All other inclusions should also be specifically addressed in the Business Sale Agreement. 

It is also good practice to consider and expressly advise the purchaser as to which items you do not wish to be included in the sale so that there is no misunderstanding.

Business sales are usually structured as “stock inclusive”, where the purchaser does not pay for additional stock on hand at the date of settlement, or “stock at valuation”, where the purchaser buys the stock on hand for an additional amount.

A stocktake happens right before settlement so that an adjustment can be made to the settlement figures to account for value of the stock on hand.

Restraint of trade
The purchaser will likely want to restrain you from setting up a competing business nearby. For this reason, a purchaser will usually insist on the inclusion of a restraint of trade time period and a distance radius within which you are prevented from owning or managing a similar business.. 

A restraint of trade clause is only enforceable if it is “reasonable”.  The restraint cannot impose too harsh of a geographic or time-based burden on the previous business owner. For example, a restraint of trade might be unreasonable if it applies to the entire city CBD for an indefinite period. However, most Business Sale Agreements do include a restraint period, and you should expect to be restrained from operating a business similar in nature anywhere between six to 24 months as a rule of thumb.

Supplier Contracts
In order to operate your business, it is likely you entered into contracts with various suppliers to provide you with the tools and stock to provide your products or services. For example, food and beverage wholesalers, leases over coffee machines and POS devices, cleaning services etc.

There are two options for dealing with these contracts:

  1. The supplier contracts can be transferred to the purchaser. In this case, the supplier will need to agree to the transfer of the contract to the purchaser; or
  2. Terminate your existing contracts with your suppliers, then it is for the purchaser to enter into new contracts with their own suppliers.

Before proceeding with the sale, you should review all your supplier contracts so that you can determine what is required by your suppliers.

Accounting and Taxation
The sale of a business creates a number of tax events that you need to give consideration to, for example, the calculation of GST on the purchase price and liability for Capital Gains Tax. In order to ensure these issues are addressed appropriately, we recommend you have your accountants and lawyers work together to ensure a wholistic and unified approach to structuring the deal.

How can RMB Lawyers help?
RMB Lawyers provides business owners with personalised legal advice. Our commercial team will take the time to listen, understand and consider your personal and business circumstances before advising you on the best way to structure the sale of your business.  

RMB Lawyers can also assist our clients with incorporating new companies and trusts, restructuring businesses in distress and winding up companies. We believe in working collaboratively with other professional service providers to ensure you receive a consistent approach to your commercial endeavours.

Contact our office to arrange a free consultation. You can contact us by by phone or our 'Ask a Question' tool on our website.