Transferring a Business During the COVID-19 Crisis

Jul 27

Caveat Emptor - buyer AND seller beware!

With lock-down and trade restrictions starting to really bite into businesses, the next few months will see a lot of activity with owners looking to cut losses on their businesses, and opportunistic purchasers looking to snap up a bargain. Negotiating a business sale/purchase is already complex so we have put together practical points for handling the unique circumstances people may face during these uncertain economic times.

The current South Australian COVID-19 measures came into place 29 June 2020 in the Emergency Management (Public Activities No 3) (COVID-19) Direction 2020. View a copy of the direction here.

The Direction includes restrictions on businesses trading such as:

1 person per 2 square metres excluding staff are not included in this requirement.
Some licenced venues including clubs, pubs and bars are required to have their own Management Plan approved by SA Health for contact-tracing.
Other required management plans depending on the business’ functions.

Transitioning Employees

For sellers, employee entitlements will not be affected so selling your business cheap and fast may not leave a lot (if any!) in your pocket by the end. More importantly, for purchasers, not taking on existing employees might be a tempting way to significantly reduce overheads but the federal government’s COVID-19 Job Keeper financial package makes holding on to trained employees not just good business practice but financially viable.

Employees that qualified for Job Keeper payments before a business sale/purchase will likely continue to qualify when the business transfers to the purchaser because the requirements focus mainly on the employee rather than the employer. The Job Keeper rules specifically state an employee can qualify even when a business changes owner. A copy of the Corona Economic Response Package (Payments and Benefits) Rules 2020 can be found here.

Most businesses need to:

Have been trading on 01 March 2020
Have suffered a shortfall in GST turnover of at least 30% compared to the same time in 2019

Most employees need to:

Have been employed at 01 March 2020
Be 18 years old but in some cases 16 or 17 years old
Reside in Australia
In the case of casual employees, have been employed for 12 months
Not be receiving a parental leave pay under the Paid Parental Leave Act 2010

Approvals and Contracts

Consider how much and for how long the business’ ability to trade and make a profit has changed. That can affect whether the business can meet its contractual obligations:

Does the business hold lines of credit with suppliers? Can you negotiate new or existing lines of credit?
Are global supply chains able to keep your business stocked? with products for the foreseeable future? Check if the business relies on third parties to trade and if that will compromise contractual obligations.
Does the business rely on high-volume customer turn-over for small transactions? Social distancing is still in place and whilst many public places have recently opened, including food courts, they have proven to be the first to be restricted due to the risk of transferring COVID-19.
Does the sale/purchase of the business require regulatory approval? In some industries, approval from a regulatory body is required. Consider the delays in being granted those approvals given social distancing measures are still in place.
Are there any restraints of trade for the seller? These are common to avoid competitive trading but their impact on the seller operating a new business may well be greater if people are spending less due to social restrictions. Consider negotiating restraint of trade clauses to the sale contract.

Transferring the Lease

Transferring a lease is necessary for a purchaser to step in and take over a business. Landlords and tenants are now subject to regulations about negotiating ways to resolve any unpaid rent on account of a tenant, in this case also the seller, suffering financial hardship and not paying rent on time. A copy of the COVID-19 Emergency Response (Commercial Leases No 2) Regulations 2020 can be found here.

All landlords and tenants are required to negotiate under the new regulations, however not all tenants are protected from a restriction against landlords taking legal action against them for failure to pay rent. If you are a seller, make sure:

Your rent is paid up to date.
If not, make sure you are protected under the regulations.
Approach your landlord and start negotiating.
If there is a dispute, seek advice on the expected or likely timeframes to resolve the dispute.
Inform the seller so they know what is going on.

Remember, these considerations are in addition to the many other issues in buying and selling a business. We welcome the opportunity to discuss and advise on your sale/purchase and help you navigate these and any other issues you have to ensure you are both legally protected and have confidence that at the end of the day you get what you expect.

For more information on any of the materials contained in this article, please contact us at [email protected] or on (08) 8310 0054.

Further Links

https://www.health.gov.au/news/health-alerts/novel-coronavirus-2019-ncov-health-alert

https://innovationandskills.sa.gov.au/

https://business.sa.gov.au/Leaving-your-business/Selling-your-business

https://www.sa.gov.au/topics/business-and-trade/exiting-a-business/selling-a-business

https://www.covid-19.sa.gov.au