This is Chapter 7 of Your Complete Guide to Selling Your Business. Check out our Introduction to the Guide go back to the beginning.
Preparing for Settlement
Once the contracts have been signed and exchanged, it’s time to prepare for settlement. As set out previously, the settlement date is the date the buyer actually takes over the business.
You will need time between the date you signed the contract and the settlement date to prepare some paperwork, and organise the transfer of any assets and intellectual property. During this time, you are also under an obligation to continue running the business as if your business was not being sold. For example, this would include fixing and paying for any equipment that may break down and continuing to maintain stock at normal levels.
The Lease
For any business operating from physical space, such as a shop or office, the lease is a significant part of preparing for settlement. Leases are generally transferred to the buyer, although the landlord can also grant the buyer a new lease. This process can take some time, and it is important to address this early.
How to transfer the lease:
Step 1: Obtain the landlord’s consent for the buyer to take over the lease. It is the buyer’s responsibility to provide you with the information that you must provide to the landlord, for example:
- the buyer’s identification documents (e.g. driver’s licence or passport);
- details of the buyer’s financial position (e.g. list of current assets);
- a history of the buyer’s business experience (e.g. previous businesses, years in the industry, employment history); and
- business references (e.g. professional referees).
Step 2: Enter into a deed of consent to assign (i.e. transfer) the lease to the buyer. This document will need to be prepared and signed by the buyer, seller and landlord either before or at settlement. You may have some additional obligations depending on which state or territory your business is located, and whether the lease is retail or commercial.
Step 3: As seller, make sure that the landlord releases you from any future obligations like paying rent or repairing the premises, and any personal guarantees when you transfer (or surrender) the lease.
Preparing for Settlement Checklist
| Employees | Notify employees of the upcoming sale and whether the buyer will be keeping them on. Notify the buyer what employee entitlements each employee is owed. |
| Requisitions | Answer any questions the buyer may have about the business (these are called ‘requisitions’). For example, ‘Does the business own all of the equipment?’ or ‘Are there any legal proceedings against you?’ |
| Lease | Get the landlord’s consent to transfer the lease and sign all required documentation. |
| Intellectual Property | Organise the transfer of your business’ intellectual property (trade marks, social media accounts and email addresses, domain names and websites). |
| Utilities and Licences | Arrange for the transfer of the relevant utilities (phone, water, electricity and EFTPOS) and licences (software, liquor or food licences). |
| Contracts | Arrange to transfer or terminate any business contracts you have with third parties, such as suppliers. |
| Business Name | Request a transfer key to transfer your business name to the buyer through ASIC Connect. |
| Equipment | Contact the owner of any equipment you have hired to transfer it to the buyer. |
| Securities | Search the PPSR to make sure there are no securities registered against the equipment. The owner of the equipment will ‘release’ the security if you pay the full amount owing on the equipment or the buyer agrees to take on the debt. |
| Stock | Calculate how much your stock is worth via a stocktake. Remember that you and the buyer can agree to not conduct a stocktake and sell the buyer all your stock at an agreed price. |
Settlement
The process of transferring ownership of the business takes place at settlement. If everything has been correctly prepared, the buyer will give you the cheque for the purchase price and you will hand over the keys to the business along with any documentation that needs to be provided. Obligations at settlement will be detailed clearly in a well drafted contract for sale.
1. Agree on a Settlement Location
You and the buyer will need to agree to a time and place for the settlement to take place. The two most common locations are at the business itself or at your lawyer’s office. Ensure that everyone who needs to attend settlement is notified of the agreed time and place and that you have organised all of the relevant items you’ll need to hand over to the buyer at settlement.
Preparing a settlement sheet
Draw up a settlement sheet before the settlement day listing out everything you need to provide to the buyer and everything the buyer needs to provide you. This will help remind you of any items that you’ll need to collect in preparation for settlement, and reduce the chance of you forgetting to get any items in return from the buyer.
2. Pay the Balance of the Purchase Price
At settlement, the buyer will give you a cheque for the balance of the purchase price. This amount will generally be adjusted to take into account any upfront payments you have already made or any amounts that you have agreed to share with the buyer.
The most common upfront payments and adjustments include:
- rent and outgoings (such as electricity, gas and water);
- employee entitlements;
- stock and work in progress; and
- debtors and creditors.
Unless settlement takes place on the day that rent is due, you’ve likely already paid the rent and outgoings for the month. This means that the buyer will need to account to you for the rent and outgoings you’ve already paid. To give you an example of how to calculate this adjustment, let’s say:
- settlement is on the 8th of November with the buyer to take over the business on the 9th; and
- rent is $5,000 a month (including GST) and you pay rent on the 1st of each month.
In this scenario, the buyer will need to account (i.e. pay you) for 22 days (9 November – 30 November) of rent. To calculate this, you’ll need to first figure out how much rent is paid on a daily basis. You can do this by multiplying the monthly payment amount by 12 then dividing by 365.
5,000 x 12 / 365 = $164.38
To then figure out the amount the buyer needs to account to you, you simply then multiply the daily amount by 22.
164.38 x 22 = $3,616
Your lawyer will be able to help you calculate any settlement adjustments.
3. Provide Payment Directions to the Buyer
In order for the buyer to prepare the cheques, let them know the total adjusted amount as well as the name of the account in which they should deposit the funds.
Provide this to the buyer via a payment direction.
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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