This is Chapter 6 of Your Complete Guide to Selling Your Business. Check out our Introduction to the Guide go back to the beginning.
The Sale Contract
Preparing the Contract
After you and the buyer have negotiated and agreed on the key commercial terms, you should record the proposed terms in an informal document called a Heads of Agreement (HOA). Parties usually express that the HOA is non-binding. The HOA will help ensure everyone is on the same page when it comes to preparing the contract.
Your lawyer can help you prepare the sale of business agreement. This is a legally binding, written agreement that will set out all the terms of the sale and detail what needs to be done to transfer the business to the buyer. It is worthwhile finding a lawyer that is a specialist in business sales as they will be familiar with the standard terms of the contract and help you move the deal along faster.
What Documents Should I Give My Lawyer?
To save time, you should provide your lawyer with copies of:
- the HOA; and
- the documents that you should have collected when originally preparing the business for sale (see ‘What Documents Do I Need to Prepare?’).
The clearer the instructions that you give your lawyer, the more complete the final draft contract will be.
Negotiating the Contract
Your lawyer will send you the draft sale contract for your review. This is your opportunity to consider the terms of the contract before it is sent to the buyer. If this is the first time you have sold a business, or if you are unsure about any part of the contract, this is a good time to arrange a call with your lawyer to run through your questions.
After you have reviewed and approved the draft contract, your lawyer will send the draft to the buyer, or their lawyer. The buyer will review and confirm that they approve the contract.
Negotiations can sometimes take time as the detailed contract provisions are negotiated, then finally agreed between the parties. In our experience, parties can help move the process along by documenting the terms they agree on in a signed Heads of Agreement before the contract is prepared.
Can I Use My Buyer’s Lawyer? You need to engage your own lawyer and should not obtain legal advice from the buyer’s lawyer. Otherwise, the buyer’s lawyer can breach professional conflict of interest obligations.
Signing the Contract
Your lawyer will then prepare at least two copies of the contracts and attach any other documents referred to in the contract, for example:
- the list of assets;
- the list of employee details;
- the lease; and
- the plant and equipment list.
You and the buyer must both sign the final contract.
What if the Buyer Backs Out After Signing? If all of the conditions to settlement have been met, for example, the transfer of the lease has been approved and the buyer has received finance, then the buyer will be in breach of the contract if they simply change their mind and refuse to proceed with the sale.
Depending on the terms of the signed contract, you may be entitled to keep the deposit, sue the buyer for breach of contract and claim damages. You should discuss your options with your lawyer to determine the next steps and the costs involved in pursuing a claim.
|Who Signs the Contract?||You as the sole trader||If you are the sole director and company secretary, you will sign the contract on behalf of the company. If there is more than one director, then at least two directors need to sign the contract or a director and the company secretary. This is a legal requirement and if the contract is not signed correctly, it may not be legally binding.|
|Who Witnesses the Contract?||A person with no interest
in the sale will sign and
date the contract
|A witness is not required|
Exchanging the Contracts
Once your lawyer has prepared and circulated a final copy of the contract:
- The seller, buyer and any guarantors arrange to sign and date a copy of the final contract.
- The seller and buyer exchange their signed copies of the contract, and then ‘counter sign’ the other copy (i.e. sign the other side’s contract).
- Parties usually exchange contracts by email with the originals to follow in the mail.
- The buyer will pay the deposit to you, your lawyer or business broker.
Once all parties have signed, the contract is now binding. You and the buyer are under an obligation towards settlement under the contract’s term.
You know how to prepare, negotiate and sign the sale contract, and how to exchange it. Read on to find out what happens to any existing lease, see your checklist for settlement, where to complete settlement and payment information. If you have any questions before you continue reading, you can contact LegalVision’s sale of business lawyers by calling 1300 544 755 or filling out the form on this page.
This chapter was an extract from LegalVision’s Sell Your Business Manual. Download the free 36-page manual featuring the sale process, preparation checklists, and your cheatsheet for negotiating terms.
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