In Short
- Assess the business value, including goodwill, stock, and assets, to set the right price.
- Negotiate with potential buyers and document key points in a term sheet.
- Address employment matters and required contract transfers early in the process.
Tips for Businesses
When selling your business, get legal advice early. Ensure you are clear on the sale price, the type of buyer, and any necessary contract transfers. These steps will help avoid delays and disputes down the line.
Selling your business can feel overwhelming, as many moving parts are involved in the overall process. Whether you are selling the business because you are looking to change industries, exploring full-time employment, or running the business is no longer viable, it is important to dedicate some thought to what the sale will look like. Whilst by no means exhaustive, this article will explore the key legal considerations when selling your business and how best to document these.
When you are ready to sell your business and begin the next chapter, it is important to understand the moving parts that will impact a successful sale.
This How to Sell Your Business Guide covers all the essential topics you need to know about selling your business.
Deciding the Right Price
Price is likely at the forefront of your mind when deciding whether or not to sell your business. The final purchase price will depend on what specific business assets you are selling as part of the transaction. Likewise, the value of each will often be negotiated amongst the parties.
Whilst no two transactions are the same, we can break down the purchase price into three categories:
- goodwill: broadly defined as intangible assets like the reputation of your business, brand identity, customer base, location and skills required to run it;
- stock: if stock is being sold as part of the transaction, this can form part of the final price; and
- plant and equipment: the equipment, tools, machinery and other physical assets required to run the business.
It is important to work with an accountant when determining and apportioning the purchase price of your business’ assets. Notably, how you apportion the purchase price between the above categories may affect the tax consequences of the sale.
Finding a Buyer
If you have dedicated blood, sweat and tears to build your business, you may want to ensure it is going to a buyer who will show the same amount of care. Or, perhaps you are more concerned about getting the right price for your business and care less about who the final buyer is. In either scenario, you will need to find a buyer who satisfies your criteria.
Even if you find the perfect buyer, prepare for at least some negotiation – nothing is ever that easy. Once the initial discussions have progressed and it is clear a buyer is serious, you should enter into a term sheet which documents any of the points you have already negotiated. Usually, these are non-binding and will make it easier to agree on a final (binding) contract when that stage comes.
Continue reading this article below the formObtaining the Necessary Consent
Depending on the type of business you run, you may have agreements on foot that require the other party’s consent to transfer that agreement to an incoming buyer. The most common example is a lease. Here, the landlord must approve the incoming buyer and consent for the lease to be assigned to them. Other contracts which may require similar approvals are equipment leases and supplier agreements.
It is important to have these conversations early, as approval processes can take time which you will need to factor into the transaction. Additionally, a business sale can be dead in the water if a key contract cannot be transferred because the other party refuses to give their consent. Therefore, it is essential you begin these investigations as soon as a buyer shows serious interest.
Making Employee Decisions
An incoming buyer has no obligation to take on the businesses’ employees, so you should raise this during initial negotiations to ascertain their intentions. If they choose not to take on any or some of your staff, you will need to terminate their employment and pay out any entitlements they have accrued.
If the buyer does wish to keep any of the employees, it will be their responsibility to provide them with new employment agreements. Usually, you and the buyer would negotiate employee entitlements. Notably, there is no obligation for a buyer to recognise past entitlements. However, if this is the case, employees may refuse to come on board unless they can keep the leave they have accrued to date. If the buyer has agreed to assume responsibility for the employee entitlements (such as any accrued annual leave), their new employment agreements should reflect this.
Draft a Sale of Business Agreement
Once you have considered and negotiated the above points, it is important to document the terms of the sale in a sale of business agreement. This contract will ensure both parties are on the same page about the rights and obligations of everyone involved in the transaction and significantly reduces the risk of a dispute down the track.
Key Takeaways
Selling your business can be as daunting as it is exciting, and several key considerations require your attention during the process. If you are considering selling your business, make sure you think about the following:
- how much you want to sell it for;
- the type of buyer you would like to take over;
- what is to happen with your employees; and
- whether you need to transfer any business contracts to the other party as part of the sale.
These issues are by no means exhaustive in terms of what is involved in selling your business. Likewise, no two transactions are the same, so seeking legal advice early as part of the sale is vital.
If you need help with your business sale, our experienced sale of 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
This is largely a financial and commercial decision, and financial professionals such as accountants and business valuers can assist you. Broadly speaking, they will look at the value of the businesses’ goodwill, stock, plant and equipment, and any other assets your business owns.
You can advertise yourself, reach out to your networks, or engage the assistance of a business broker to assist you with finding a buyer. No matter how you choose to do it, make sure you find a buyer you are comfortable with.
It is wise to document the initial discussions and negotiations in a term sheet, which is usually a non-binding agreement which sets out the key terms. This is a good way of ensuring the parties are on the same page early. Eventually, you should draft a sale of business agreement which is the binding contract outlining all of the terms of the sale.
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