You have built a successful business but the time has come to sell and move on to a new venture. You know the operating side of your business well, but you may not be as confident when you need to prepare the business for sale. This article sets out some legal and practical considerations to assist you with that journey, including:

  • understanding your business and presenting it in the best light;
  • ensuring that your documentation and records are in order;
  • structuring your business and the sale;
  • protecting your confidential information when speaking with potential buyers; and
  • navigating the sale process.

Understanding and Presenting Your Business

A potential buyer’s main focus at the outset will be whether your business is profitable. When you prepare your business for sale, being knowledgeable about how your business makes and spends money is key. This includes being aware of any items which affect this, such as: 

  • non-recurring expenditure; and 
  • any personal assets which have been purchased by your business. 

In addition, you should be aware of your business’ position in the market and what the business’ strategy is to ensure it stays profitable. 

No buyer will expect a business to be perfect. If there are any issues with the business, do not shy away from them. Instead, you should be proactive and fix them. If you are unable to fix them, make sure you understand the risks.          

Documentation and Records

Potential buyers will have questions about your business and will want to see key documentation to support the financials. You can prepare for this part of the sale by ensuring that your contracts and business records have been maintained and are up to date and accessible. This is called ‘vendor due diligence’.

The key aspects to consider are set out in the table below.

Accounts and accounting records

You should keep these for at least the previous three years, or for as long as your business has existed. You should prepare them on a consistent basis each year, and the more formal the better.

Key contracts

Preferably, agreements with your key customers and suppliers should be in writing, properly signed by all parties, dated and still within the agreement’s term.

Registers and ASIC filings

If you operate your business through a corporate entity, you should at a minimum maintain a register of shareholders, option holders and directors. Share certificates should be issued each time shares in your company are issued or transferred. Your ASIC filings should reflect your registers and be up-to-date.

Leases

Any rental properties should be accompanied by a fully signed and dated copy of your lease which is still in force.

Intellectual property

If your business uses a trade mark, it will have greater protection if it is registered and that registration is maintained. All IP your business uses, including domain names, should be registered to the entity or person that is selling the business.

Employees

You will need to consider any employees, including whether:

  • each of your employees has entered into a written, signed and dated employment agreement;
  • any changes to the terms of their employment have been recorded in writing;
  • your payroll records show that you have paid all employees correctly; and
  • you are accruing all employee entitlements correctly in your accounts

Licences

You will need to find out whether you hold all licences and permits required to operate your business, and what the process for transferring these to a buyer is.

Structuring Your Business and the Sale

Your business may be more attractive to buyers if it is operated under a corporate structure. This is because: 

  • it will be clear who the seller needs to be; and 
  • all the assets and liabilities are more likely to be contained in the same entity or group. 

A corporate structure can also be used to protect your business’ core assets against trading losses by hiving off such assets (usually intellectual property rights) into a holding company or IP company separate to the operating entity. 

If you own and operate your business as a sole trader or under a partnership arrangement, you will have to personally transfer each individual asset and liability that makes up the business to a buyer in order to sell them your business. 

If you own and operate your business through a corporate structure (usually a proprietary limited company), either: 

  • the corporate entity can sell the assets comprising your business to a buyer; or 
  • you and any other shareholders can sell your shareholdings to a buyer. 

In a business sale, each asset comprising the business needs to be transferred to the buyer. It is possible for a buyer to pick and choose which assets and liabilities they want to take on. In a share sale, the buyer acquires the entire company and business as a package. 

Protecting Your Confidential Information 

Before commencing detailed discussions about the sale with potential buyers or sharing confidential information about your business, you should prepare and enter into a confidentiality agreement (or “non-disclosure agreement”) with the potential buyer. 

A confidentiality agreement can be: 

  • ‘one-way’, which means that only the information that you share with the potential buyer is protected;  or 
  • ‘mutual’, which means that both parties’ information is protected. 

Under the agreement, the recipient of the information agrees to:

  • keep it confidential (except in prescribed circumstances, such as where the information is required to be disclosed by law); 
  • only use it for a specified purpose (e.g. evaluating their proposed purchase of the business); 
  • protect the information from unauthorised disclosure; and
  • be held responsible for all actions of its representatives (e.g. employees and agents) in relation to the disclosure and use of the confidential information. 

Navigating the Sale Process

Once you have decided to sell your business and you have chosen a buyer, you may be wondering how to prepare for the next stage of the sale.

Heads of Agreement

It is often a good idea to document the key terms that you have agreed for the sale in a heads of agreement. This is not a legally binding document (unless otherwise stated), but is a useful tool to assist with negotiating the key terms upfront and acts as a point of reference when moving on to drafting the transaction documentation. 

Exclusivity Period

A buyer may ask to include an exclusivity provision in the heads of agreement (which is a legally binding provision). Such a provision would prevent you from having or continuing discussions with other potential purchasers in relation to the sale of your business for a certain period of time on the basis that the buyer has started to incur costs in relation to the purchase. 

Due Diligence

Generally, while the heads of agreement are being negotiated or once they have been signed, a buyer will undertake a due diligence process. They may instruct advisors to carry out different due diligence workstreams, including financial, legal and operational. You will need to provide answers to the buyer’s questions and documentation to support those answers. This will be a much smoother process if you already have your documentation and records in order. 

Sale Agreement

Whilst the due diligence process is taking place, drafts of the transaction documents will be circulated. The buyer’s lawyers will often prepare the first draft, but this varies on a deal-by-deal basis. Which type of agreement you need will depend on whether you are selling the shares in your company or the assets which make up your business. The sale agreement will set out the parameters of your liability in relation to the business going forward. You may require other documents in addition to the sale agreement, such as a disclosure letter and employment or consultancy agreements if you are continuing your involvement with the business once you have sold it.

Conditions Precedent 

You should consider what approvals you will need to transfer your business. If there are actions which you need to complete before your business can be sold and which are outside your immediate control (such as obtaining the consent of a landlord to assign a lease or getting a regulatory body to approve the transfer of a permit), these are often included as ‘conditions precedent’ in the sale agreement. This means that the sale will not complete until these conditions are satisfied. 

If you are selling your business by way of a share sale and there are minority shareholders who are not willing to sell their shares, the majority owners may be able to force a sale of the entire company if there are ‘drag-along rights’ included in the company’s shareholders’ deed. There will be a prescribed process set out in the shareholders’ deed which will need to be followed by the majority shareholders in order to get the benefit of this right.

Exchange

In terms of process, once due diligence is complete and you’ve agreed all the terms of the sale, you will sign (often called ‘exchange’) a conditional sale agreement. Completion of the sale will then take place at a later date once all the conditions are satisfied and you will be responsible for running the business in the ordinary course during this interim period.

Completion 

On the completion date (whether this is the date that you sign the sale agreement or a later date if conditions are required to first be satisfied), the main action items are that the buyer pays the purchase price and the seller hands over ownership of the business. 

Timeline

It is difficult to predict how quickly you can complete the sale of your business. The timeline will depend on the

  • size of your business;
  • structure of the sale;
  • extent of the due diligence process being undertaken; and 
  • number of conditions precedent. 

The timings may also be tax-driven. The liquidity of the business or the availability of finance for the buyer can also affect the timeline. 

Key Takeaways

When the time comes to prepare your business for sale, you will need to:

  • be familiar with your business’ processes and documents; and
  • decide how you wish to sell your business.

If you need assistance with drafting or reviewing transaction documents or any stage in the sale process, please contact LegalVision’s sale of business lawyers on 1300 544 755 or fill out the form on this page.

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