6 Legal Issues to Consider When Selling a Business

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Table of Contents

• 1.  What is being sold or transferred when selling a business?
• 2.  How is the purchase price to be apportioned?
• 3.  Restraints – to impose or not?
• 4.  Training Periods – Occasionally Important
• 5.  Continued Employment of Employees
• 6.  Taxes
• Key Takeaways

Building a business is a tough, time consuming process. Selling a business can also be tough. When you decide to sell, it can be tempting to get the deal done as quickly as possible so you can move onto your next project. This, unfortunately, is not a great approach. There are a number of important issues that need to be considered when selling a business. You need to consider them, and make sure your sale of business agreement accurately reflects your agreement with your buyer (or seller) in relation to these points.

1.  What is being sold or transferred when selling a business?

The most important issue to agree on is what exactly is being included in the sale of the business. Although it would seem obvious that the parties to the sale and purchase of a business would need to agree on this point, it is a common trigger for subsequent disputes. The items included when selling a business will change depending on the type of business and the requirements of the purchaser, but some of the more important elements include:

• the business name;
• any plant and equipment that the business uses;
• any property owned by the business;
• any agreements the business is a party too (including leases, distribution agreement, customer contracts etc.);
• the contact details of the business;
• information relating to clients;
• any shares in the company that operates the business (this would be unusual – when selling a business the business is normally sold as a going concern; shares are not usually transferred);
• anything else, whether tangible or intangible, that can be of assistance in operating the business.

2.  How is the purchase price to be apportioned?

Obviously the purchase price is one of the first items to be discussed in negotiations when selling a business. There are a number of ways a business can be valued, but at the end of the day the agreed price must be one which enables both parties to move forward with sale.

Once the total price has been agreed it is necessary to apportion it to plant, equipment or goodwill. A manufacturing business will generally apportion a higher percentage to plant and equipment than a service business, which will apportion a higher percentage to goodwill.

Important, the tax consequences of selling a business will differ depending on how the purchase price is apportioned (as explained in point 6).

3.  Restraints – to impose or not?

A restraint is basically an agreement between the seller and purchaser of a business that the seller will not operate a similar business to the business being sold after the sale. Restraints are common when a niche business is being sold. They are less common in more commoditised industries.

A restraint will generally be geographic (e.g. within 3 kilometres of the site of the business) and/or time based (e.g. 6 months from the sale of the business). If a restraint is too restrictive it may be deemed unenforceable by the courts, so it’s important to make sure that this does not occur.

4.  Training Periods – Occasionally Important

Occasionally, the buyer or a business will want the seller to stay on after the completion of the sale in order to train up the buyer in how to operate the business. This is relatively common in the sale of small businesses. Generally a training period will not last too long – between 7 and 28 days is relatively common.

5.  Continued Employment of Employees

As a general rule, the law will require the buyer to offer continued employment to the employees of the business before the sale goes through. The terms and conditions of the sale of business agreement will also generally cover this. If the buyer chooses not to continue the employment of the employees for a legitimate reason, then the buyer should be required to terminate the employment of those employees prior to completion as a condition of the sale. Additionally, the seller should be required to comply with the law with regards to compensation.

6.  Taxes

It’s important to carefully consider the tax consequences of the sale before agreeing on the structure of the deal. Issues that should be considered from a tax perspective include:

–       GST- GST may apply to the sale, or it may not, depending on the structure of the deal. If it does apply the purchase prices will obviously be impacted by 10%.

–       CGT – Capital Gains Tax may apply in full, or the seller may be eligible for a concession (the most common one being the 25% concession for assets held over 12 months). The tax rate on the sale of the business that will apply to the seller can vary between 0% and 46.5%. Remember, the higher the tax rate, the more you will have sold the business for!

Key Takeaways

Selling a business is an exciting time, but make sure you get the legal work done properly! Call LegalVision today on 1300 544 755 to speak with a sale of business lawyer who can help you through the steps.