In Short
- Selling a business involves several stages, including valuation, legal documentation and settlement.
- A sale agreement sets out key terms, warranties and conditions to protect both parties.
- The final stage includes exchanging agreements, transferring assets and completing settlement obligations.
Tips for Businesses
Engage a qualified lawyer early to manage legal complexities, ensure contracts are watertight and protect your interests. Clarify settlement obligations in advance to avoid delays, and review lease arrangements carefully to prevent ongoing liabilities after the sale.
Selling your business is a significant event, but the process can be overwhelming and legally complex. This article explains what is involved in each of the stages of selling your business and the importance of engaging a lawyer to assist you in the process.
1. Valuing Your Business
Before listing your business on the market, the crucial first step is to assess its value. The valuation can be conducted by you as the vendor, the prospective purchaser, or jointly by both parties. It is typical to engage an independent accounting firm, appointed by either the vendor or purchaser, to perform the valuation process and objectively determine value. This independent assessment guides the parties in negotiating and agreeing upon the final purchase price for the transaction. There are various valuation methods that may be utilised for a business and its assets, with the most widely adopted being:
- discounted cash flow, where it calculates the value of a business as being equal to the present value of all its estimated future cash flows
- net asset valuation, where the value of your business is determined by the total of all its current assets less all of its current liabilities;
- completion accounts, where it calculates the value of your business at completion; and
- the locked-box approach, where a pre-completion balance sheet will be used to determine the purchase price with no recourse to any post-completion price adjustments.
2. Preparing the Sale of Business Agreement
Once the value of your business has been determined, both you and the purchaser must then agree on the transaction structure. There are two structures available for the purchase of your business:
- asset purchase, where the purchaser acquires each of the individual assets that make up your business, or a selection of those assets, and any agreed business liabilities; and
- share purchase, where the purchaser acquires all of the shares in the company that operates your business (and so automatically acquires all of the business assets and liabilities).
For the purposes of this article, we mainly focus on the asset purchase structure. If the transaction structure is agreed between you and the purchaser, your lawyer will then prepare a draft contract, also known as a sale of business agreement, in accordance with your business type and the conditions of the sale. In the meanwhile, the purchase may have already commenced their due diligence enquiries into your business.
What Should My Agreement Include?
As the vendor, you, of course, want to limit the scope of the warranties and liabilities. Doing so reduces your exposure and involvement with the business after the sale is complete.
Your sale of business agreement should include the:
- key commercial terms of the sale (purchase price, plant and equipment list and restraints of trade);
- standard sale of business clauses (when the settlement will occur and the obligations of each party to complete settlement); and
- special conditions relevant to the sale of the business (transferring any licences that are required for business operations).
Your lawyer can assist you in determining the terms relevant to the sale of your business and ensure they are appropriately addressed in your agreement.
Continue reading this article below the form3. Finalising the Sale of Business Agreement
After preparing the sale of business agreement, your lawyer will send it to the purchaser or their lawyer. The purchaser or their lawyer will review the agreement and send it back to you. They may include a list of amendments to the terms. It is then a matter of negotiating the amendments until both parties are satisfied with the terms.
Each time the purchaser makes amendments, it is essential to have your lawyer review the terms. Some changes to the agreement may impact your obligations to complete settlement or your rights after the sale is complete. Therefore, it is best to be aware of any potential changes by ensuring your lawyer understands and reviews each proposed amendment.
Lease Documentation
When selling your business with a lease, there are two options for handling the lease. You can either:
- Transfer the Existing Lease: This option involves assigning your rights under the lease to the purchaser. You can assign your rights through a deed of assignment of lease, known in short as a deed of assignment. The deed of assignment is a legal document allowing you to transfer the lease of the premises to the purchaser of the business.
- Surrender the Lease: This option allows the purchaser to negotiate a new lease with the landlord. You can end the lease between you and the landlord through a deed of surrender of lease, known in short as a deed of surrender. Once parties enter into a deed of surrender, the existing lease terminates. The landlord can then enter into a new agreement with the purchaser to lease the business premises after settlement.
Both you and the purchaser should agree upon an option for handling the lease before drafting your sale of business agreement, so that the agreement can appropriately set out the settlement obligations to either assign or surrender the lease.
It is common for the landlord’s lawyer to prepare the lease documents and provide it to your lawyer and the purchaser for review. It is important to review the lease documents and amend them if necessary to ensure you do not have any obligations under the existing lease after the sale of your business is complete.
Want to sell your business? A share sale may be beneficial compared to an asset sale. Download our free Guide to Share Sales today.
4. Agreement Exchange and Settlement
The final stage involves exchanging the sale of business agreement and completing the conditions of the settlement. In most cases, the business sale agreement will outline the settlement process in detail. This process can be quite intricate, and well-drafted completion clauses will help ensure a smooth settlement. It is, therefore, crucial to review them thoroughly in accordance with the agreement. If you are unfamiliar with the settlement process, your lawyer can assist with exchanging the agreements and fulfilling your settlement obligations. Notably, your business sale agreement will typically specify any conditions precedent that must be met before settlement, and in this regard, your lawyers will have procedures in place to confirm all such conditions have been satisfied prior to settlement occurring.
Exchanging Agreements
After you agree to and finalise the amendments in stage three, it is time to sign and exchange the sale of business agreement. The exchange of agreements usually occurs in two steps:
- you sign a copy of the agreement and send it to the purchaser’s lawyer; and
- the purchaser signs a copy of the agreement and sends it to your lawyer.
The exchange will typically take place via email with the original signed documents sent to each party via post.
Settlement
The settlement involves finalising your obligations set out in the sale of business agreement before, or on, the settlement date. Your lawyer will be able to identify and assist with all the requirements to complete the sale. There is generally a delay between exchanging agreements and the date of settlement. The delay is to allow for:
- a stocktake of inventory;
- you to organise the transfer of assets, such as supply contracts and the business name;
- time for the purchaser to prepare their finances for the outstanding payment amount;
- replying to requisitions (NSW only) to address any outstanding queries raised by the purchaser’s lawyer about the business; and
- adjustments of outgoings on the lease and employee entitlements.
Post-Settlement
Following the settlement, there will usually be various post-settlement matters to attend to, for example:
- make certain filings with the Australian Securities and Investments Commission (ASIC), if shares are acquired as part of the transaction;
- paying any duty due on the transfer of your company’s assets to the purchaser;
- certain administrative matters, such as insurance, payroll, PAYG, GST and superannuation arrangements.
Key Takeaways
Selling your business involves more than merely finding a purchaser and preparing and signing the sale of business agreement. It can be a complicated process, so it is important to be aware of, and understand, the four key legal stages of selling your business.
If you are selling your business, our experienced sale of business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
A ‘going concern’ refers to the sale of a business where all necessary components for its continued operation are included, and the business is operational until the transfer date. Such sales may be GST-free if specific conditions are met.
Allocating the purchase price involves dividing it among assets like goodwill, stock, and plant and equipment. This allocation affects tax implications and should be agreed upon by both parties during negotiations.
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