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.

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, 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:

  1. selling the assets of the business (e.g. client lists and physical equipment); or
  2. 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.

Key Takeaways

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.

COVID-19 Business Survey
LegalVision is conducting a survey on the impact of COVID-19 for businesses across Australia. The survey takes 2 minutes to complete and all responses are anonymous. We would appreciate your input. Take the survey now.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. For just $199 per month, membership unlocks unlimited lawyer consultations, faster turnaround times, free legal templates and members-only discounts.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • By submitting this form, you agree to receive emails from LegalVision and can unsubscribe at any time. See our full Privacy Policy.
  • This field is for validation purposes and should be left unchanged.
Our Awards
  • 2019 Top 25 Startups - LinkedIn 2019 Top 25 Startups - LinkedIn
  • 2019 NewLaw Firm of the Year - Australian Law Awards 2019 NewLaw Firm of the Year - Australian Law Awards
  • 2020 Fastest Growing Law Firm - Financial Times APAC 500 2020 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer
Privacy Policy Snapshot

We collect and store information about you. Let us explain why we do this.

What information do you collect?

We collect a range of data about you, including your contact details, legal issues and data on how you use our website.

How do you collect information?

We collect information over the phone, by email and through our website.

What do you do with this information?

We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.

How do I contact you?

You can always see what data you’ve stored with us.

Questions, comments or complaints? Reach out on 1300 544 755 or email us at info@legalvision.com.au

View Privacy Policy