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Selling a business is far more complicated than most buyers and sellers expect. You, as the seller, may have set up systems and processes that help run the business with minimal input from yourself. This can include automated payments, client management software and everything else used to run the business. Even simple businesses are composed of many elements. You must transfer all these elements to the buyer, which can make the selling process far longer than you initially anticipate. This article discusses the common mistakes people often make when selling a business. 

Elements of a Business 

Businesses have several essential elements which help make the business run smoothly. As part of the sale process, you will need to transfer the following: 

  • intellectual property (IP) – you must consider what intellectual property you use in your business and how you will transfer this to the buyer. IP can include trade marks, domains and data about your customers. If you use client management software, you must also transfer this licence;
  • contracts – you will need to transfer all the contracts you use in the operation of the business, including your contracts with clients. The technical legal term to transfer contracts is assigning or novating. Ideally, your contracts will allow you to assign them without your clients having to consent to the transfer. If each of your client’s consent is required, it can cause a massive headache or frustrate the sale; and
  • financed or leased equipment – this type of contract is more restrictive and requires the equipment finance provider to approve the buyer. If you have these arrangements in place, then you must speak with the equipment finance provider as they may require substantial documents to transfer this arrangement to the buyer or require that the equipment is paid out.

Below we will explain some common mistakes people often make when selling a business.

Rushing the Sale

By far the most common stressor in a business sale is having to rush the transfer process and scrambling at the last minute. As we can see above, there are several elements that you must transfer, such as the lease or software subscription contracts. Depending on the way you draft your sale agreement, these transfers can be conditions to the sale completing (i.e. conditions precedent). Alternatively, the incomplete transfer of all essential elements can be a breach of contract if you do not transfer these elements by a set date. While both situations are frustrating, not satisfying the conditions precedent within a certain amount of time can allow the buyer to terminate the contract. Consequently, you will potentially lose the sale. Before agreeing to a timeline with the buyer, it is essential to have a thorough discussion with a business lawyer to understand the process and set a realistic timeline. 

Recording the Correct Structure 

There are many different ways in which you can own or operate a business. For example: 

  • as a sole trader; 
  • through a company; 
  • through a partnership; or
  • through a trust.

As a seller, you should have a good understanding of your business structure. However, businesses can have very complex structures. You may need to speak to your accountant or lawyer to confirm the legal entities that own the business assets, IP and hold the contracts. 

It is relatively common that sellers do not understand their structure. A typical example is where the business is set up as a trustee with a corporate trustee (i.e. a company). Just listing the company as the seller and not the trust is incorrect. This can be a breach of contract that will be messy if not picked up before the sale agreement is signed. Where a holding company owns a business (holding the IP) and trading company, you must list both companies on the sale agreement. 

Having All Security Interests Released 

There are several situations in which other people or companies will have securities registered over the assets of your business. You make these registrations on the Personal Property and Securities Register (PPSR). There are various types of registrations, and these can be over specific assets, such as financed machinery. The registrations can also be over all assets of the business. 

You make PPSR registrations when you lease or finance equipment, obtain a loan from a bank or even where you have payment terms with suppliers. Having PPSR registrations restricts your ability to transfer the legal ownership of the assets. Business sale agreements will typically state that you must unencumber all the assets of the business at completion. Therefore, you must speak with the entities that hold PPSR registrations over the business assets. In doing so, you understand the requirements to have the registrations removed. This is an area that can cause significant delays when discovered late in the piece. Your lawyer can assist you by searching the PPSR to determine the current registrations. 

Not Engaging Appropriate Advisors

It is always essential to engage and speak with qualified professionals early on when selling your business. While you may have current advisors, they must have experience dealing with business sales. As well, it is best if they have experience with the specific type of business you are selling. Typical advisors that you can engage, include: 

  • accountant or tax advisor; 
  • lawyer; and 
  • business broker. 

Your accountant or tax advisor can assist you with the valuation of the business and determining the tax implications of the sale. A lawyer will assist you with the contracts, negotiations, and completion of the sale. While a business broker can help you to find a qualified buyer. You should not underestimate the importance of a qualified buyer. This is because the buyer will need to be approved by the landlord (if applicable) and may also require finance to pay the purchase price. It is vital to engage these professionals early in the process as their advice will guide the process and timeline. 

Key Takeaways 

Preparation and having a realistic timeline are the easiest ways to avoid unnecessary stress throughout the sale process. Common mistakes when selling a business include:

  • rushing the sale;
  • not understanding your business structure;
  • not releasing all your security interests; and
  • failing to engage a qualified professional.

If you require assistance with the sale of your business, contact LegalVision’s sale of business lawyers on 1300 544 755 or fill out the form on this page.

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