In Short
- Confidentiality Agreement: Protects sensitive business information during negotiations with potential buyers.
- Term Sheet: Outlines key sale terms, such as price and included assets, serving as a precursor to the Sale of Business Agreement.
- Sale of Business Agreement: Legally binds the buyer to purchase your business under agreed terms, minimising your post-sale liabilities.
Tips for Businesses
Before selling your business, consult with legal and financial advisors to structure ownership in a way that minimises tax liabilities on the sale proceeds. Proper planning can significantly impact the financial outcome of your business exit.
‘Exit the business’: the industry term for selling or otherwise leaving your business. It’s something that many business owners think about at different stages of running their business. You might exit your business soon after it started, say, if you have a startup and would like to sell it for a profit. Or you might be approaching an age where you’d like to retire and sell your business. Whether you’re exiting the business because you want some extra liquidity or you want to try new things, there are a few key legal requirements and considerations to bear in mind before approaching buyers.
You might look to exit the business in a number of ways, including:
- an acquisition or sale of the entire business to another company
- an initial public offering (IPO) of shares on a stock exchange
- a management buyout, where the existing management team acquires the business
- an acqui-hire, where another company acquires the business primarily for the skills and expertise of the team rather than for the products/services
- a merger with or absorption into another company
- selling or licensing valuable intellectual property or assets
- liquidating and selling off the company’s assets piecemeal
- passing ownership to the next generation in a family business succession
- gradually winding down operations over time
Here we focus on an acquisition or sale of the entire business to another company.
Exit the Business – Preparing Legal Documents
When working up to selling your business, there is front of house considerations and behind the scenes matters to take care of. Front of house, it’s important to have a Confidentiality Agreement, Term Sheet and Sale of Business Agreement to structure the sale of your business.
Confidentiality Agreement
To induce a buyer into buying your business, you need to tell them all relevant information about your how your business operates and it’s financial position and success. This is likely to be confidential business information that you wouldn’t like anyone but the prospective buyer to have access to, or your competitors would be onto you in a flash.
Confidential information can include;
-
- financial information (revenue, profit and loss, revenue);
- clients – who are they, where did you get them from (i.e. what is your marketing strategy); and
- your intellectual property (any codes, software, trade secrets, patents, trade marks or copyright you have the rights to).
You need to protect all this information with a Confidentiality Agreement. Otherwise, you could be left in a situation where you have disclosed important information to a potential buyer. For example, the buyer pulls out and promptly starts to build a business based on the handy hints, tips and tricks of the trade you have trustingly disclosed without legal protection.
Continue reading this article below the formTerm Sheet (or Heads of Agreement)
In essence, a Term Sheet sets out the terms on which the sale of your business will proceed. Details such as the price, when the sale can expect to be settled and which assets are included should all be detailed. A term sheet can be binding or non-binding and is the document leading up to the Sale of Business Agreement. A Term Sheet makes it easier and more cost effective to draft the Sale of Business Agreement.
Sale of Business Agreement
This is the document that contractually binds a buyer to purchase your business. Buyers are not bound to buy your business until they sign this document. As a seller, you won’t want too many representations and warranties to be included. Representations and warranties are statements the purchaser can say they relied upon when deciding to purchase the business. If something goes wrong, the purchaser can take action against you because you breached a representation or warranty.
Behind the Scenes
Before you sell your business and suddenly have a massive (taxable) lump sum land in your bank account, it’s best to be smart about the way you own your business to avoid giving away too much to the Australian Tax Office.
There are two ways to sell a business:
- selling the assets of the business (e.g. client lists and physical equipment); or
- selling the Pty Ltd company (the company, the assets – everything).
If you are selling your shares in the company, you need to figure out how you will own these shares. If you own your shares personally, any lump sum you receive for the business will be taxed at your regular personal tax rate. The $500,000 you receive as part of the sale is taxed heavily and you have a sizeable chunk taken out of the payment you get for your business.
If, on the other hand, you hold your shares through a trust, the trust can distribute the proceeds of the sale to beneficiaries who are lower-income earners and thus have lower tax brackets. The lump sum can be spread around these beneficiaries and over the years so that the tax implications of your sale are minimised.
Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.
Key Takeaways
Preparing your business for sale involves front of house and behind the scenes considerations and legal documents. In front of the house, your key legal documents for a business sale are a confidentiality agreement, term sheet, and sale of business agreement. These three documents are all designed to protect you as the seller of your business. Behind the scenes, you need to ensure that the way you own your business is set up to minimise the tax implications of receiving a sizeable lump sum in your bank account all at once.
If you need further assistance on this matter, our experienced 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.
Frequently Asked Questions
Do I need a Letter of Intent before selling?
Yes. A non-binding Letter of Intent (LOI) outlines the key deal terms both parties agree to before proceeding with negotiations and due diligence.
What should be in an Asset Purchase Agreement?
An APA should cover the assets being sold, the purchase price, assumed liabilities, representations and warranties, non-compete terms, closing conditions and other protections for buyer and seller.
We appreciate your feedback – your submission has been successfully received.
