Selling your business is a significant event, but the process can be overwhelming and legally complex. There are four legal stages of selling your business successfully:
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.
Preparing the Sale of Business Agreement
When selling your business, both you and the purchaser must first agree on key commercial terms. Such terms may include the:
- sale price;
- proposed completion date; and
- equipment being sold.
Your lawyer will then prepare a draft contract also known as a sale of business agreement. After you review and approve the agreement, your lawyer will send it to the purchaser or their lawyer. The agreement may either be a standard contract of sale or a contract tailored specifically to the sale. Your lawyer will draft the agreement according to your business type and the conditions of the sale.
It is important to have a lawyer prepare your agreement to ensure it addresses warranties and liabilities. As the vendor, you 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 will include the:
- key commercial terms of the sale (purchase price, 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 to determine the terms relevant to the sale of your business and ensure they are appropriately drafted in your agreement.
Amending 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.
When selling your business with a lease, there are two options for handling the lease. You can either:
- transfer the existing lease; or
- surrender the lease so that the buyer can negotiate a new lease.
Both you and the purchaser should agree upon an option for handling the lease before your lawyer prepares the sale of business agreement. Therefore, the agreement can appropriately set out the settlement obligations to either assign or surrender the lease.
Transferring the Lease
Transferring the lease involves assigning your rights under the lease to the purchaser. You can assign your rights through a deed of assignment of lease (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.
Before the transfer of the lease, you must also obtain consent from the landlord. The landlord will usually assess whether the purchaser is a suitable tenant in terms of whether they can run the business and pay rent. To provide consent to the transfer, the landlord will usually request the following information from the purchaser:
- financial information;
- business history and CV; and
- professional references.
Once the landlord provides their consent to the assignment, they will have their lawyer prepare a deed of assignment. To ensure there is an appropriate transfer of the lease and a release of your obligations to the landlord, your lawyer should review the deed of assignment.
Surrendering the Lease
If you choose this option, before the purchaser can enter into a new lease with the landlord, you will need to either terminate or surrender your old lease. You can end the lease between you and the landlord through a deed of surrender of lease (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.
The date of surrender of the existing lease is the same as the commencement date of the purchaser’s new lease (the date of settlement of the sale of the business). If the purchaser agrees to enter into a new lease with the landlord, your lawyer should review the deed of surrender to confirm it effectively terminates your lease and releases you from your obligations to the landlord.
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 lease after the sale of your business is complete.
Agreement Exchange and Settlement
The final stage involves exchanging the sale of business agreement and completing the conditions of the settlement. This process can be quite complicated, so it is crucial to take the time to review it correctly in line with the agreement. If you are unfamiliar with the settlement process, your lawyer can assist with exchanging the agreements and carrying out your settlement obligations.
After you agree to and finalise the amendments in stage two, 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.
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.
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 require assistance with preparing a sale of business agreement, or another part of the sale of business process, contact one of LegalVision’s sale of business lawyers on 1300 544 755 or fill out the form on this page.
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