When selling a business, it is important to be aware of the critical matters that need to be addressed during the transaction process. Our guide provides key steps you should consider, to ensure the successful sale of a business and importantly five key things to avoid.
Key Steps to follow as the owner when Selling a Business:
1) Gather Information about your Business
An owner selling a business (“vendor”) is commonly required to produce the contract of sale for the purchaser to consider. In Victoria, if the total price of a business is $450,000 or less, the vendor is required to give the purchaser a Section 52 Vendor Statement (“Section 52 Statement”) pursuant to section 52 of the Estate Agents Act 1980 (Vic) before they sign a contract of sale or pay a deposit. The Section 52 Statement contains financial information about the business including the profit and loss statement, and the balance sheet of the business for the last two accounting periods.
The vendor may need to produce documents such as a list of equipment being sold, certificate of registration of the business name, details of employees (such as position / job description, employment status, hourly rates, and current entitlements), certificate of registration of any trademark, evidence of ownership of any domain name, and any current contracts (such as supply and distribution agreements).
The vendor’s lawyer will need information concerning the business for the purpose of, for example, understanding the ownership structure of the business, whether the vendor is selling the business and assets, or selling shares in a company and units in a trust.
If you are in business with multiple owners, your lawyer will need to investigate whether any ownership agreements (such as a shareholder or partnership agreement) have implications for the sale, and whether there are certain existing documents to ensure you are released from all ongoing liability with respect to the business.
2) Understand your Legal Obligations as a business owner
Things to consider include whether:
- you require third-party consents to complete the sale of a business, e.g. the landlord’s prior consent to assign the lease (if the business is on a leased premises);
- any release of security interests over the business at or prior to settlement;
- any licences, permits or rights that need to be assigned to the purchaser;
- any ongoing services / supplier contracts that need to be transferred to the purchaser; and
- to include restraint of trade and non-solicitation terms in the Contract of Sale.
3) Prepare the Contract of Sale
In preparing the contract, the vendor’s lawyer may wish to include special conditions which:
- exclude warranties about the condition of equipment;
- exclude warranties about the takings of the business and require the purchaser to rely on their own enquiries;
- require the purchaser to provide a personal guarantor where the purchasing entity is a company;
- require the purchaser to pay interest on the purchase price if completion is delayed;
- terms of ongoing arrangements with the vendor parties if any are to work in the business; and
- indemnifies the vendor against breach of any continuing agreements (including the lease) by the purchaser after completion.
4) Employee Agreements
The vendor must advise how employees are to be dealt with on successful transfer of the business. Will the purchaser offer employment at its discretion, or will the vendor require the purchaser to offer employment to all current employees on their current terms and conditions?
5) Business Valuation
Think about having your business valued by an independent third party. A business valuation can determine the value of the intangible assets such as the goodwill, reputation, trademarks / intellectual property of the business, along with the equipment, plant, and premises (if applicable).
The purchaser is assured a fair price in terms of the current market and this can reduce delay with protracted negotiations on sale price between the parties.
6) After Signing Contract
Once the parties have signed the contract:
- the purchaser will pay the deposit (and then the purchase price to the vendor on settlement);
- the vendor will transfer any intellectual property to the purchaser;
- the vendor will need to obtain consent for assignment of the lease (and any variations to the lease);
- the purchaser will need to secure a new lease if the vendor’s lease has expired;
- the vendor will provide all plant and equipment to the purchaser (as has been represented);
- the vendor will either terminate employment or transfer employees to the purchaser after settlement;
- the vendor will arrange the release of security interests (if any);
- the vendor will provide access to the premises at settlement;
- the parties will conduct a stocktake; and
- the vendor will transfer any existing business contracts with third parties.
Five Key Things to avoid as the owner when Selling a Business:
1) Not Being Ready to Settle
Failing to be ready for the handover can result in delays and cost implications, therefore it is important to work through these issues in proper time.
2) Not Valuing your Business Correctly
Ensure that the sale price is an accurate reflection of the assets and the goodwill of the business. Preparing a thorough inventory of assets (including intellectual property, stock, plants, fixtures, and equipment) will help greatly in this process.
3) Not Maintaining Confidentiality
When engaging in negotiations prior to selling a business, you will need to take care to not breach any confidentiality obligations.
4) Giving Inaccurate or False Information
Ensure all information provided is accurate and truthful. If you make misleading pre-contractual statements or representations about the financial information relating to the business’ turnover expenses and profitability (or goodwill), the purchaser may have contractual and statutory remedies against you.
5) Poor Handover Process
Ensure that you have prepared a thorough and documented handover process. A proper handover process may include formal training and / or handover period where you are willing to assist the purchaser in the business for a set period after settlement.
Selling a business is a big decision, and we hope this information has helped you understand the vendor’s considerations and the pitfalls to avoid.
Our Commercial Lawyers have expertise to provide the best legal advice for owners looking to sell their business. To find out how our Commercial Lawyers can help you contact us today on +61 3 9822 8588.