Selling your business – make sure you get the details right
When you’re selling your business, it can be a difficult and emotional time. You have often spent many years building it, investing in it and working long hours to make it profitable and successful. A lawyer is helpful throughout the sales preparation process and the actual sale – not only protecting you legally, but also ensuring that all practical considerations are taken into account and that you don’t make decisions from an emotional perspective.
There are many important issues that need to be considered when selling your business, particularly in regard to ensuring that the Contract for Sale of Business accurately reflects your agreement with your buyer.
What does the process for selling your business look like?
There are typically four stages to a sale of business transaction.
Offer: Receiving and accepting an offer from a buyer
When you find a willing buyer, you will often receive from them either a written letter or verbal offer. A written offer is always preferable, as it will include the principal terms and minimise the potential for confusion at a later stage. If you choose to accept the offer, you should also accept it in writing, but importantly, you should express that no legal obligations are to arise until a formal Contract for Sale of Business is entered into by both parties.
You should ensure that these early communications cover off other important considerations for the business. These are outlined in more detail later, but they principally concern matters such as price, assets of the sale, transfer of employees, conditions (financing and/or due diligence), training as part of the sale and any restraints on competing.
Exchange: Ensuring the Contract for Sale of Business accurately reflects your wishes
You should engage a lawyer once you have agreed to the principal terms of the sale, as you will need to prepare a Contract for Sale of Business. If you have already had a formal written offer and acceptance, it will speed this part up, as a lot of the details of the sale will already have been negotiated. A lawyer will ensure that the contract accurately reflects your wishes regarding the sale and can represent you in any further negotiations with the purchaser or the purchaser’s lawyers.
Once agreement is reached, the parties’ lawyers will finalise the Contract for Sale of Business and prepare it for execution. The purchaser usually pays a deposit when the contract is formally exchanged.
Settlement: Preparing for settlement and transferring the assets of the business
Once the contract has been exchanged, you will need to commence the process of readying for settlement, including transferring the business’s assets. The types of things you need to ensure are ready to be transferred for use on and from the settlement date include items such as:
- Client lists
- Employee details
- Leases, licenses and permits
- Business names
Any security interests or other encumbrances against the business or the business assets will need to be discharged or released. If you have provided a personal guarantee in respect of the lease of the business premises or any other continuing contract, ideally you should seek a release on or before settlement.
Post-settlement: Tidying things up
Once the business is sold, there will be a number of matters that you need to attend to finalise the sales process. These may include:
- Registering transfers
- Finalising tax returns, activity statements and instalment notices
- Cancelling your ABN and your business name (if appropriate)
Important matters for you to consider when selling your business
When you are negotiating the offer and the terms of sale with a potential purchaser there are many important matters that you need to consider and these will vary depending on the type of business that you own. Outlined below are six legal considerations that need to be taken into account for most businesses.
Apportioning the value of the business to plant, equipment and goodwill
A business can be valued in a number of ways, however ultimately the purchase price must be one which both parties agree to in order to move forward with the sale. There is no one set method for calculating a valuation, and you can use a combination of methods, with some of the most common being estimation of future profits, assessment of the value of the business’s assets, or how much you think the goodwill that your business has accumulated is worth.
Once you have agreed on a valuation, it is necessary to apportion it to plant, equipment or goodwill. Again, this is dependent on the type of business you run – for example, for a manufacturing business you would apportion a higher percentage to plant or equipment than for an online business, where a higher percentage is likely to be apportioned to goodwill. There are tax consequences depending on how the purchase price is apportioned and you should obtain advice from your accountant about this.
What are you actually selling when you are selling your business?
A critical issue is what exactly is being included in the sale of the business. Although this may seem self-evident, it is often a cause of subsequent disputes.
Obviously, what is being included in the sale of a business is highly dependent on the type of business you are selling. However, some of the more important things that should be considered as part of the sale include:
- The business name, logo, website and contact details of the business
- Property, plant and equipment
- Any agreements that the business is a party to, for example leases or distribution agreements
- Client information
- Any other tangible or intangible items that are used in the business operations
Buyer likely to require a restraint on competing to protect the business
A restraint is a legal contract between you and the purchaser of your business that prevents you from engaging in a similar business to the business being sold. Its intention is to protect trade secrets and proprietary information. It is important that restraints should not be too restrictive, as they are only enforceable by the courts if they are reasonable.
Restraints will generally refer to specific geographic areas (e.g. within five kilometres of the business site) and/or be time-based, referring to a specific period (e.g. 12 months from the sale of the business).
Do your employees finish up or keep working for the new owner?
When you sell your business, your employees will either transfer with the business to the new owner, or conclude their employment. The buyer may offer continued employment to the employees of the business before settlement of the sale occurs. The terms and conditions of the Contract for Sale of Business should also cover this process.
If the employees transfer with the business, you need to provide the new owner with the relevant employee information, including their rights, entitlements, contracts and any other matters. These need to be up to date before selling your business. The types of records may include:
- Leave – including annual leave, personal leave and long service leave entitlements
- Tax – including PAYG and FBT
- Apprenticeship and traineeship agreements
- Probation and training records
- Performance reviews
- Personal contact details
There are some employee entitlements that the new owner must recognise and others that they do not have to recognise. The Contract for Sale of Business should also address the process for adjusting the employee entitlements for any transferring employees.
Training of the new business owners as part of the sale
It is relatively common practice in the sale of small businesses that the buyer of a business will request that the seller stays on after the sale to train the buyer and assist the new owners to get up to speed with its operations. Typically, the period is not lengthy – often being between seven and 28 days.
Taxation consequences of the sale
You should obtain advice from an accountant on the taxation implications of the sale. Issues to be considered include GST – with purchase price impacted by 10% if it is applicable – and CGT, which may be applied fully, or you may be eligible for a concession. As the tax consequences of the sale depend on how the deal is structured, this should be a consideration before the sale proceeds.
For more information, please see The vital importance of a business exit strategy.