LEGAL TIPS YOU NEED TO KNOW WHEN SELLING YOUR BUSINESS
Whether you’re stepping back, moving on to the next opportunity or freeing up capital for other priorities, selling your business can be stressful – or rewarding – depending on how your sale proceeds.
From preparation to paperwork, here are our top tips for a smoother sale.
1. Get ready
Also known as “vendor due diligence”, getting your business ready for sale before going on the market will help attract more buyers. Your accountant and your business lawyer can provide crucial support to do this.
You will need to:
- Make sure your financial accounts are all up to date and in a state that can be provided to a purchaser (your accountant can help with this).
- Get an idea of how much your business is worth (an accountant or independent valuer can help with this).
- Make sure your legal documentation is current (your lawyer can help with this).
This includes reviewing:
Your lease(s) –
- Make sure that the lease allows for a sufficient further term (including renewals) to give comfort to the purchaser that the business premises will be available for an adequate term going forward.
- Consider what will happen to the lease once you exit the business. You may wish to assign (transfer) the lease to the purchaser, which requires landlord approval. Generally, a landlord cannot unreasonably withhold that consent. It can be useful to discuss the proposed sale with your landlord and see what information they will require about any potential purchaser in order for your landlord to consider the assignment. Note that a standard assignment of a lease does not mean you are “free and clear” – you as the tenant (and any guarantor) are still liable if the assignee (the purchaser of your business) does not comply with the terms of the lease. You can ask the landlord to waive your obligations, but they do not have to agree to that.
Employment agreements –
Make sure all employment contracts and employment records are up to date. This includes making sure that all employment agreements are in writing and signed by both parties.
Supplier and customer contracts –
Like your lease, check that any relevant supplier or customer contracts are up-to-date and have a satisfactory term remaining. You will need to check that they are capable of being “assigned” (transferred”) to a purchaser and what steps (if any) need to be followed to do so, such as getting the suppliers’/customers’ consent.
Intellectual property –
- Ensure that any applicable intellectual property is appropriately documented (showing who owns it) and protected. This may mean having any business trademarks registered or renewed.
- Resolve any and all disputes with third parties which could be seen as negative to a prospective purchaser (e.g. employees, suppliers, customers).
- Make sure any website and social media campaigns/pages are up to date and represent the business in a favorable light.
2. Bring in the buyers
Decide how you want to market your business for sale. There are a variety of business brokers to choose from. You can ask brokers to present proposals to you about how they would look to market your business and attract the best buyers, which should help you make sure your business is in the right hands to get the best value for you.
Depending on the business and your personal situation there may be other options. Consider whether any of your children or employees would want to take over the business if you were to sell it. Sales to these sorts of buyers can be staged if the buyer does not have immediate access to funding to buy your business in one go. Your accountant and lawyer can assist you to make this kind of arrangement.
3. Commit to the sale
One of the most important steps of the process is getting your Sale and Purchase Agreement right. It’s worth discussing this with a business lawyer early on in the process, so you (and the agreement!) are clear on the terms on which you are prepared to sell.
There will likely be negotiation on these terms as buyers look to put in their offers. Your lawyer can help manage these negotiations for you and ensure the agreed terms align with your goals and are workable.
- When you enter into a Sale and Purchase Agreement it will likely be subject to various conditions which will need to be satisfied before settlement. Common conditions include the purchaser obtaining finance, doing due diligence of the business, and getting landlord approval (if there is a lease).
- Under the due diligence condition, the purchaser will generally be looking to examine your business’ financial performance, lease, supplier and customer contracts among other things. This is where the time spent preparing your business for sale can really pay off, making buyer due diligence a lot quicker and easier.
Once the conditions of the Sale and Purchase Agreement are all satisfied, then you will be legally required to sell the business to the purchaser on the settlement date.
Once the agreement is unconditional you will need to do a number of things including:
- consulting with your employees as required under employment law (where there is a sale of a business they will technically be redundant even if the purchaser is going to employ them following settlement), and
- arranging items that must be supplied to the purchaser on settlement which might include a signed deed of assignment of lease from the landlord and a release of any securities that your bank of other lender or supplier holds over any assets that the purchaser is buying.
Your lawyer will be able to help you work through these steps.
4. Complete the sale (settlement day)
On settlement day you and the purchaser complete the sale and purchase of the business. The buyer will pay the purchase price and ownership of the business and assets will pass to them. Your lawyer will prepare a settlement statement which sets out the total amount payable by the purchaser, less any deposit paid and apportionments for items such as rent paid in advance.
Often there is a stock take on the settlement day once settlement is completed. Where this happens, the agreement may require the vendor’s lawyer to hold back part of the purchase price received until the stock take has been determined, in case stock in trade was lower than agreed and an adjustment payment needs to be refunded to the purchaser (and vice versa with the purchaser’s lawyer).
How can we help?
Choosing an experienced, expert commercial lawyer is essential to getting the right advice when selling your business. WRMK’s team of specialist business lawyers are available to advise you throughout the process. Please contact us if you would like an initial discussion – often a conversation early on can prevent little niggles turning into big problems further down the track.
Our thanks to Keegan Jones for writing this article.
Every effort has been made to ensure accuracy in this article. However, the items are necessarily generalised and readers are urged to seek specific advice on particular matters and not rely solely on this text.