‘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.
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.
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, the buyer then pulls out and then promptly starts to build a business based on the handy hints, tips and tricks of the trade you have trustingly disclosed without legal protection.
Term 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 which contractually binds a buyer to purchasing your business. Until a buyer signs this document, they are not bound to buy your business. As the seller of a business, 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, and 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 years, so that the tax implications of your sale are minimised.
Preparing your business for sale involves front of house and behind the scenes considerations and legal documents. Front of 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. Get in touch with one of our business lawyers if you would like more information or help with preparing legal documents to sell your business.