When selling a business, there are several factors to consider at each stage of the process. Whether you are listing the business for sale privately or through a business broker, it is important to remember that a manufacturing business is a specialised business. This means that it assumes different skill requirements and risks to a retail or hospitality business. Accordingly, you can expect your prospective purchasers will:
want to understand the details behind what makes the business ‘work’; and
likely demonstrate more cautious behaviour in the way they approach the sale and business negotiations with you.
This article will outline some of the key legal considerations for selling your manufacturing business, which will help you:
anticipate the concerns of the purchaser; and
address these so that you can achieve the best possible outcome from this opportunity.
Before Listing a Business for Sale: Asset Considerations
One way to boost purchaser confidence is to carefully consider which business assets you will include in the sale. If you are planning to list your business with a business broker, you may have already received some guidance on the type of information that you need to prepare to ensure that your listing appears as professional as possible.
In particular, your intellectual property (IP) and manufacturing equipment are two specific assets which you should carefully consider when deciding whether to include or exclude them from the sale.
1. Intellectual Property
IP, particularly if registered with IP Australia, is a financial asset – it has value and the amount you attribute to it should go towards the goodwill component of the listed sale price. Examples of IP that businesses often transfer during a sale include:
If your business name or logo appears on your products, you may already have a registered trade mark with IP Australia. If you have applied for a trade mark, but are unsure if it is currently registered, IP Australia has an online, publicly-accessible Trademark Register available, where you can search for a business or product name.
The IP of the business should be transferred to the purchaser to allow them to continue to use the branding of the business. It is standard practice for all IP to be moved, including:
the business name;
copyright material; and
any trade marks.
The purchaser will usually expect to obtain the rights to these as part of the sale. Where you wish to retain ownership of some of the IP, you should ensure your contract excludes the IP from the sale and the value of the purchase price. Where the ownership of IP is crucial to the operation of the business, it is common to include it.
2. Plant and Equipment
In preparing for the sale, it is helpful to create a precise list of all plant and equipment that is:
owned by you;
used in the operation of the business; and
part of the sale.
Further, it is useful to create a list of anything that will not be part of the sale. For example, you should exclude any plant or equipment which you are hiring and do not own. When your lawyer drafts a formal sale of business agreement, the equipment list is one of the key documents attached to the agreement. By preparing a detailed equipment list as early as you can, you will:
speed up the legal processes; and
ensure clarity and transparency about what items need to be handed over to the purchaser on the day of settlement.
Allowing Due Diligence: Disclosure Considerations
As part of the sale process, a purchaser will request legal, commercial and financial information about the business to conduct due diligence. Thorough due diligence assists purchasers in making their decision to proceed with the sale.
You may be reluctant to hand over confidential information about the business without some certainty that you are dealing with a serious buyer. In this situation, you may want to consider having the purchaser sign either a heads of agreement or a non-disclosure agreement (NDA). Both of these options can assist with safeguarding the confidential information of your business, as they limit how a prospective purchaser can use and disclose the information they receive during the due diligence process.
Once the purchaser has signed an NDA, it is best to disclose all relevant information about the business, such as third-party contracts and equipment hire agreements.
1. Distribution Contracts
A manufacturing business will often have entered into contractual agreements with third-party:
These third-party contracts will likely make up part of what the purchaser receives in the sale. A transfer of these contracts is not automatic and not always allowable under the terms of your signed agreements. You can minimise the risk of a future dispute in the lead up to settlement.
In the alternative, you may minimise the risk of dispute after the settlement date if your sale of business agreement sets out:
which contracts you are required to transfer to the purchaser; and
whether the purchaser must directly negotiate with the third party to enter into a new agreement.
If there are contracts to transfer, you will most likely need to obtain the consent of the third party to do so. It is essential to consider this early on in the process to ensure you can meet the requirements of any third party in respect of the transfer.
2. Equipment Hire Agreements
In a medium to large scale manufacturing business, it is also common to have some units of equipment hired under an equipment hire agreement with a third party. In these cases, it would be wise to check that your signed agreement allows for the equipment lease to be transferred to the purchaser, as this is not always possible. If this is not possible, it would be worth discussing this with the purchaser as part of your pre-contractual negotiations.
Your lawyer can draft appropriate terms into your sale of business agreement to:
reflect your specific situation; and
ensure that it is clear what your intentions and obligations are in regards to your equipment hire arrangements.
Settlement Plans: Hand-Over Considerations
As part of your pre-contractual negotiations, it is vital to discuss the level of training or ‘on the job’ support you are willing to offer a purchaser. While providing training is not a legal requirement, it is not uncommon for sellers to offer a short handover period as a gesture of goodwill. Typically, purchasers will request this training as part of the commercial negotiations.
You may want to think about what your plans are for after the sale. Are you interested in staying on in the business as an employee or contractor? Or, are you planning a holiday after the settlement date?
Your sale of business agreement will set out the details of any training that you will provide. It may include specific information about training in the use of machinery, or it may be broader and refer only to support in business operations.
If you are interested in staying on as an employee or contractor, you should also consider entering into an employment or contractual agreement with the purchaser to:
protect your interests; and
ensure your wages, entitlements, and responsibilities are clear.
It is best to:
agree on the terms of this agreement as part of the sale of business agreement negotiations; and
finalise and sign the document before settlement.
2. Ongoing Restraint of Trade Considerations
After the settlement date, when the transfer of the business ownership is complete, you will need to consider your ongoing restraint of trade obligations. Depending on its terms, the restraint in your sale of business agreement may prevent you from:
operating a similar business after the sale; and
interacting with the existing suppliers or client base.
The restraint will bind you for a set period after you sell the business. Some of the key questions to think about include:
what are your plans for after the sale? Do you intend to retire or do you want to operate a similar business elsewhere?;
do you want to continue working with any of your suppliers, customers or employees?; and
are there any exclusive agreements that have been transferred to the purchaser as part of the sale?
The Ultimate Guide to Selling a Business
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.
A manufacturing business is a specialised business. As such, the sale of your business should be approached differently to the sale of a retail store or an online business. The more thought you give to listing the business to a professional standard, the more attractive your business looks to a prospective buyer. Additionally, your pre-contractual negotiations will be smoother if you have taken careful note of:
firstly, your business assets;
secondly, contracts with third parties; and
finally, the level of ongoing involvement in the business you are prepared to offer after the sale.
Once you have agreed on the key commercial terms with a purchaser, you will need to provide them with a sale of business agreement to progress the sale. If you have any questions, contact LegalVision’s business sale lawyers on 1300 544 755 or fill out the form on this page.
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