Purchasing a Premises for your Small Business Part 1

October 12, 2018

Whether you are just starting out or well established, the decision to purchase premises for your small business is a significant one.

This 2-part bulletin provides a brief overview of the purchasing process by covering the four key phases: selecting the appropriate purchasing entity; preparing the contract; conducting searches and due diligence; and settlement.

Selecting a Purchasing Entity

Once you have found your ideal business premises and negotiated a price, you will need to consider how you want to structure your purchase.

What structure you choose can have wide reaching effects on areas such as tax, estate and succession planning, and asset protection.

Some business owners may wish to purchase premises in their own name, or in the name of the entity that operates the business. This might be easiest from an accounting or banking point of view, but it often lacks asset protection and tax management flexibility. In our experience alternatives such as a ‘clean’ discretionary trust, or a self-managed super fund should be considered.

It may also be possible to separate the ownership of the land and fixtures from any plant and equipment or improvements that are eligible for accelerated depreciation to ensure you achieve maximum tax benefits and asset protection.

See our video for more information on structuring.

The Contract

The contract will normally be prepared by the solicitor acting for the vendor (seller) and will be prepared with the vendor’s best interests in mind. It is therefore critical that we, as the purchaser’s solicitor, see the contract before it is signed to make sure it accurately reflects the agreement and contains all critical terms and conditions required to protect the purchaser’s interests.

Some of the things to be reviewed can be as simple as whether the parties’ names are correctly spelt, or the property is accurately described, as typos are unfortunately an all too common occurrence.

A more important consideration is whether the contract accurately identifies items that are to be included in the sale. Usually anything fixed to the land or building is a fixture and will be included, unless listed as excluded in the contract. Anything that is not fixed (chattels) must be listed in the contract or it will not be included in the sale. This can be particularly relevant when purchasing commercial premises as significant pieces of equipment may be present during an inspection, and it is important to ensure all parties are clear as to exactly what is included, or excluded, from the sale.

GST is another important consideration. The contract must be clear as to whether GST applies, and if so, whether GST is included in the purchase price, or whether it is payable in addition to the purchase price.

If we can read the contract before it is signed, we may be able to structure the sale to access GST exemptions, meaning no GST at all.

If a Purchaser is relying on finance from a bank to fund the purchase, the contract should always be conditional on finance approval, even where a verbal approval has been given. We have seen circumstances where a verbal approval was not honoured once the application reached the bank’s credit section. The purchaser had signed an unconditional contract and lost its deposit and risked being sued by our vendor client for any loss on a resale.

We recommend that the contract be subject to the purchaser obtaining satisfactory building and pest reports and being satisfied with its due diligence enquiries. The contract should allow the purchaser to terminate the contract if these conditions are not satisfied; and receive a full refund of their deposit.

We will examine searches and due diligence in more detail in part 2 of our bulletin on purchasing premises for your small business.