In Short
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A Sale of Business Agreement should include key clauses like the purchase price, asset transfer, and employee transfer.
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Conditions precedent may require specific actions (e.g., financing or lease transfer) before finalising the sale.
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Ensure clear terms for the transfer of customer and supplier contracts and include restraints on the seller’s future competition.
Tips for Businesses
Before finalising a Sale of Business Agreement, make sure to specify which assets are included and clearly define employee entitlements. Seek professional advice to accurately determine the purchase price and include necessary clauses for conditions precedent and asset transfers. Always comply with statutory employee obligations during the process.
The sale or purchase of a business is an exciting process for everyone involved. Whether you are ready to become your own boss or sell the business you’ve built to pursue something new, it is essential to be aware of the key clauses in a Sale of Business Agreement, which can make all the difference in making sure the transaction runs smoothly. This article will set out 7 key clauses that should be included in your Sale of Business Agreement.
What should a Sale of Business Agreement cover?
Once you and the other transacting party have negotiated and agreed on the key commercial terms of the sale, the next step is to set these terms out in a Sale of Business Agreement. This Agreement should cover things like:
- purchase price;
- conditions precedent to the sale;
- which assets are included in the sale and the transfer of ownership of those assets;
- how the employees will be transferred;
- the transfer of customer and supplier contracts;
- restraint of trade; and
- warranties about the business.
1. Setting the Price
Determining the value of a business can be tricky. The purchase price is one of the most heavily negotiated terms in a sale, and as a seller, it’s important to remain commercial and realistic when setting your price. It’s a good idea to seek advice from your accountant or financial advisor to help with the business valuation process. The sale price should consider the goodwill and tangible assets of the business, as well as any intellectual property that forms part of the overall value.
Including a clause on purchase price is essential in a business sale contract. This clause should clearly set the deposit amount and the balance of the purchase price (which together make up the total price), as well as when these are to be paid by the buyer. The purchase price clause should also make reference to any adjustments that are to be applied to the purchase price. This can include things like an adjustment in favour of the buyer for any outstanding employee entitlements that have been accrued to date.
2. Conditions Precedent
Depending on the buyer and the business, specific things may need to occur before settlement can occur. These are known as “conditions precedent”. It can include things such as:
- the buyer being able to obtain finance to fund the purchase;
- the landlord giving their consent to the transfer of the lease; or
- the seller successfully transferred a specific equipment lease.
The conditions precedent clause should indicate the steps needed for the parties to fulfil their obligations, the time frame within which these obligations should be completed, whether conditions precedent can be waived by the benefiting party and what happens if a condition is not met.
The seller assigning specific necessary contracts may also be a condition precedent. This is especially important when the business cannot function without those contracts in place.
3. Assets
At a high level, assets can generally fall into two categories:
- Tangible assets: These are things like cash, on-hand inventory, vehicles, computers, office furniture, and other fixtures.
- Intangible assets: These mostly pertain to intellectual property but include things like trademarks, trade secrets, domain names, databases and industry knowledge.
Both asset categories make up a business’s foundation and contribute to its value. It’s important as a purchaser to make sure that you are buying all the relevant assets needed to keep the business running successfully.
Clearly defining which assets are included in a business sale is vital for all parties involved. Prior to the sale, it is a good idea to prepare a list of the business’s physical assets, which are to be transferred to the buyer. Where assets are to be excluded from the sale, this should be set out within the Sale of Business Contract. The contract should also set out the process for the transfer of assets.
4. The Transfer of Employees
The third key clause to include in your Sale of Business Agreement is the details of transferring employees and the terms of their transfer. Notably, both parties must ensure that they are in compliance with any statutory obligations regarding the employees and employee entitlements.
When transferring employees, it is important that you consider the following:
- whether the employees will be transferred to the buyer and if the buyer is recognising prior service; or
- if they are not transferred to the buyer.
If you are transferring employees from one business to another, the employment between the employee and the existing company will be recognised, and any entitlements, such as annual leave, will need to be transferred to the new entity. The leave entitlements will then be deducted from the purchase price of the business.
Alternatively, the employment agreements can be terminated by the Buyer and the entitlements paid out to the employees of the business. It is important that you don’t rehire a terminated employee within three months as this may be deemed a transfer, and you may be liable for their entitlement.
5. Transfer of customer and supplier contracts
As the seller, if you have any customer or supplier contracts, you must transfer any contracts you have with third parties to the buyer. For example, if you have a contract with a food supplier and you do not transfer this arrangement, the purchaser may lack a supply of food for the cafe business at settlement, and you may be in breach of your obligations under the agreement.
Be aware that some contracts may require the consent of the third-party supplier to be transferred. As the seller, you should ensure that the contract includes special conditions specifically addressing significant business contracts and the terms of their transfer.
6. Restraint of Trade
When entering into a Sale of Business Agreement, it makes sense for the buyer to restrain the seller. This prevents the seller from opening a competing business or poaching existing customers. Restraint of trade clauses is common in business sale contracts. They can stop the seller from soliciting clients, employees, or suppliers.
These restraints protect the buyer’s most valuable assets, such as the client base, employees, and supplier relationships. When including a restraint of trade, it’s important to consider its reasonableness. This impacts its legal enforceability. For example, a restraint prohibiting the seller from operating in Australia for 10 years could be unreasonable. Limiting the restraint to a specific geographic area is a more enforceable option.
7. Warranties
Warranties are contractual assurances from the seller to the buyer. If these assurances are incorrect, it can result in a breach of warranty. For instance, as a seller, you might claim that your business owns the intellectual property it uses. If this claim turns out to be false, the buyer can seek compensation for any resulting losses due to the breach.
- warranty time limits;
- warranty claim limits; and/or
- what are some common things covered by warranties.
8. Indemnity
An indemnity is a contractual obligation where one party agrees to reimburse the other for specific liabilities. This offers the buyer additional protection.
Key Takeaways
A well-crafted Sale of Business Agreement is crucial for safeguarding both buyers’ and sellers’ interests.
The document should include key elements, such as a clear purchase price and payment terms. It must outline specific conditions precedent to settlement and a comprehensive list of assets. Employee transfer arrangements should be detailed, along with provisions for assigning customer and supplier contracts. Reasonable restraint of trade clauses should also be included to protect the buyer. Finally, the agreement should include robust warranties and indemnities to safeguard both parties.
Each component should be tailored to the specific business and transaction. Clearly outline what’s included in the sale. If you have any questions regarding key clauses, our experienced commercial and business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Continue reading this article below the formFrequently Asked Questions
Do employees automatically transfer to the new owner?
Not necessarily. The agreement should clearly explain if existing employees will move to the buyer and how any accrued entitlements (e.g., leave) will be handled.
Why is specifying the purchase price important?
It outlines exactly what the buyer pays and when, including any deposits, balance payments, or adjustments (for example, outstanding employee entitlements), which helps avoid misunderstandings.
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