Plan a Seamless Business Sale – Your Key Considerations

Selling a business is a significant transaction that involves various legal, financial, and strategic considerations. Comprehensive preparation is essential for a successful outcome. Preparation includes considering the pre-contractual and contractual considerations that you must address before selling your business. While no one can predict the unknown, sufficient preparation supports a smooth transaction.

Pre-Contractual Considerations

Before entering into a formal sale agreement, it’s crucial to ensure that your business is in the best possible shape. Preparing your business for sale involves addressing legal, financial, and operational matters that could impact the value and ease of the transaction.

Current business/contract relationships

A thorough review of all existing contracts and relationships is important. This includes supplier agreements, customer contracts, employment agreements, leases, and other binding obligations. You want to ensure that all contracts are up-to-date and that there are no unforeseen obligations that could impact the buyer or affect the sale price.

Protection of intellectual property/technology

Intellectual property (IP) and technology assets, such as trademarks, patents, copyrights, and proprietary software, should be clearly documented and protected. A review of your IP portfolio ensures that ownership is clear, rights are properly assigned, and any tech assets are legally protected. If there are any outstanding IP disputes or licensing issues, these should be resolved before moving forward with the sale.

Separate Business and Personal

It is critical that the business's financial records reflect a clear separation between personal and business finances. Ensure that all business transactions are clear and accurately documented. Address any personal loans or transactions that may be intertwined with the business’s finances to avoid confusion or complications during due diligence. Clean and well-organized financial records, including profit and loss statements, balance sheets, and tax filings, will enhance the transparency of the business and improve buyer confidence.

Accurate Share Register and Companies Office

A review of your company’s shares and filings with the Companies Office is fundamental to ensure that ownership structures and corporate governance records are accurate and current. Make sure that all shares are properly accounted for and that there are no discrepancies in the official records, such as outdated shareholder information or unresolved equity issues. This will avoid complications in the transfer process.

Contractual Considerations

Once the pre-sale groundwork is in place, the next step is to formalize the sale through a binding contract. This agreement will set out the terms and conditions of the transaction, and it is vital that the agreement is carefully drafted to protect both parties. Legal assistance is critical during this stage of the process, accounting advice is also key. Accountants will work alongside your legal advisors ensuring you are aware of any tax or GST consequences, and implementing the best structure for the sale of your business.

Price

Ensure that you have a clear understanding of the business’ valuation, and be prepared to justify the asking price based on factors like assets, liabilities, market conditions, and future growth potential. The sale agreement should clearly outline the agreed purchase price and any adjustments, such as performance-related conditions, that might affect the final amount.

Vendors will need to be prepared for alternative payment methods to be incorporated in the payment price. Two common examples are vendor finance and earn outs. Vendor finance occurs where the vendor loans part or all of the purchase price to the purchaser. The purchaser then repays the remaining purchase price on agreed terms over time which often includes interest being paid and security being provided to the vendor. In comparison, an earn out structure generally comprises an initial payment of the purchase price and whether the remainder is payable if the business performs in an agreed manner, e.g. a particular profit target is met within a certain timeframe.

Conditions

Conditions are specific requirements that must be satisfied before the sale can proceed. These might include securing regulatory approvals, obtaining financing, or ensuring the satisfactory completion of due diligence. The conditions need to be clearly spelled out in the contract in unambiguous language to protect both the seller and the buyer.

Warranties and Indemnities

As part of the sale, the seller will typically provide warranties and indemnities regarding the condition of the business. This includes assurances that financial statements are accurate, there are no hidden liabilities, and intellectual property rights are properly owned. The sale agreement should specify the scope of these warranties and indemnities and the duration for which the seller will be liable for any breaches. Warranties and indemnities are often the subject of the most negotiation between the parties to a business sale agreement. By ensuring the pre-contract matters are right, the vendors will feel comfortable that they will comply with the warranties which, if breached, can be expensive.

Post sale obligations or restrictions

After the sale, there may be ongoing obligations or restrictions, particularly with regard to restraint of trade clauses or paying the remaining purchase price (such as vendor finance or earn out arrangements). Buyers often include restraint of trade clauses to protect the business from competition post-sale. It is important that any post-sale obligations, such as restrictions on setting up a competing business or poaching employees, are clearly outlined and fair in scope, duration, and geographical range.

Handover Period

A handover period is often included in the sale agreement. This may involve the vendor providing training to the new owner, transferring customer or supplier relationships, and assisting with any operational issues that arise. A clear timeline and a defined scope of responsibilities during the handover period will help ensure that the parties are on the same page and the business continues to operate smoothly after the sale.

Conclusion

Selling your business is a multifaceted process that requires careful preparation and attention to detail. By addressing the pre-contractual considerations—such as tidying up financial records, securing intellectual property, and ensuring legal clarity—you’ll be setting the stage for a successful sale. Once you move into the contractual phase, make sure that all key terms are clearly defined, including the sale price, warranties, and post-sale obligations.

It is strongly encouraged that your legal advisors and accountants are involved early to help navigate you through the process of selling your business and ensure your best interests are a priority. Don’t leave it too late, contact Sarah Churstain or Jason Kelly at Ford Sumner Lawyers to assist with the sale of your business.