Selling a Business? Key Considerations for a Vendor

When selling a business, there are several matters that a Vendor must consider throughout the process, from the time that the Vendor decides to sell their business until the settlement is complete and beyond. We have outlined some of the key considerations for a vendor in order for a smooth and seamless transaction to occur.

Due Diligence

Prior to offering your business for sale, it is vital to ensure that you are in the best possible position to sell and obtain the best available price. In order to achieve this, you must first investigate the legal and financial position of your business.

In a business sale, the Purchaser will generally conduct their own due diligence, however it is important for you to complete your own due diligence prior to offering the business for sale so that you can accurately answer any questions and address any issues that may arise from a potential purchaser’s due diligence.

Ability to sell

It is essential that prior to offering your business for sale, you confirm that you can in fact sell your business and whether any specific process is to be applied when selling.  In satisfying this, you should review your company constitution and any shareholders agreement to gain an understanding of any process that should be followed in offering the business for sale.

Approvals

When selling your business, you may need to obtain certain third-party approvals. While these approvals can be obtained once the contract for sale of business has been exchanged, it is important to know what approvals the sale may be subject to so that these can be included in the contract and any procedure in obtaining such approval can be complied with.

Employees

The greatest asset for any business is the employees engaged by the business. When considering a potential sale of your business, it is prudent to ensure that all employment contracts and records are up to date. This includes ensuring that all employment contracts cover current roles of employees, and all employee rights, including wages, superannuation and accrued leave are up to date.

Security

It is important to conduct a search of the Personal Property and Securities Register (“PPSR”) to ensure that all assets that are to be sold with the business do not have any security registrations over them. If you find any registrations that should have been discharged, you will need to contact the secured party to arrange for the registration to be removed.

There may be certain security registrations that may not be removed until settlement of the sale of business. Such registrations may include registrations from a lender who is to be repaid out of the settlement funds, or a supplier who is securing the goods provided to the business. 

Contract for Sale of Business

When you have found a buyer for your business and agreed on the particulars of the sale, it is prudent to engage a solicitor to draft a contract to encompass the terms of the sale of business.

Key terms to be included in the contract

The contract for sale of business will set out the key terms and conditions of the sale including each parties’ obligations prior to the finalisation of the sale of business. It is vital that all essential matters of the sale of business are included in the contract to avoid any misunderstandings between the parties in the future.

Some of the key matters to be included in the contract include:

• Purchase Price

The contract will outline the purchase price, including how it is to be apportioned between equipment and goodwill and whether the price of any stock is included in the purchase price. The term “goodwill” refers to the intangible assets of the business that are to be sold, including the reputation, customer base, and location of the business. 

• Assets

When considering the purchase price, we recommend that you obtain financial advice to assist you with valuing the business and obtain an independent valuation for it. In determining the purchase price, you ought to consider the type of business that you operate and whether stock is to be included in the purchase price. 

The specific assets which form part of the sale of business ought to be listed in the contract so that the purchaser knows exactly what they are purchasing, and the parties know how the purchase price should be apportioned. Key assets which should be included in the contract include all plant and equipment and intellectual property (including trade marks, business name, website and social media accounts).

• Agreements

The contract ought to include all agreements which are substantial to the operation of the business and require third-party consent to assign to the Purchaser. It is important to disclose all key agreements so that both parties understand exactly what the Purchaser must take over on settlement.

Such agreements may include:

• Lease of the business premises;
• Equipment leases; and
• Supplier agreements (including any supplier of stock and utilities, such as telephone, internet and electricity).

By including these agreements in the contract for sale of business, you are disclosing the costs, obligations and liabilities under such agreements that the Purchaser will be required to take on.

• Conditions Precedent

Many contracts will contain certain conditions which must be satisfied before the sale of business can be finalised. Such conditions may include the assignment of the lease and any other essential agreements from you to the Purchaser.

The conditions precedent may also set out timeframes in which certain conditions are to be satisfied, or certain actions are to be completed by a particular party. It is important that you understand any actions that you are required to take and any timeframe that may apply.

• Warranties and Indemnities

It is common under a contract for sale of business that both parties provide warranties to the other. As a vendor, you will generally be required to warrant to the purchaser that particular facts you have disclosed are in fact true.

As a vendor, it is important that the breadth of the warranties are limited so as to reduce any future liabilities. It is vital that you obtain a lawyer to prepare your contract for sale of business to ensure that your future liabilities and warranties are limited.

• Restraints

Another matter commonly addressed in a contract for sale of business is that of a vendor restraint. As you may have operated the business for some time, you will have access to vital information and contacts which may allow you to establish or work for a competing business after settlement of the sale. In order to address such a risk, a purchaser will generally require that a restraint is included in the contract.

It is important that you understand what actions may be prohibited under the agreement and we recommend that you seek legal advice on any restraints.

Settlement

Once the contract has been exchanged, the parties ought to commence finalising their obligations under the contract so that settlement can occur. Such obligations generally include:

• finalising the assignment of lease or any other agreement or licence;
• arranging a stocktake to be completed prior to settlement;
• organising the transfer of all assets, including the business name;
• finalising outstanding accounts and arranging for them to be transferred to the Purchaser; and
• ensuring that all PPSR registrations have been removed or obtaining sufficient confirmation that such registrations will be removed.

How can we help?

JHK Legal has extensive experience in assisting client’s with their sale of business to achieve a smooth and efficient transition.

If you would like to have a discussion on how we can assist you with the sale of your business, please do not hesitate to contact us.