For business owners the sale of a business can often seem like a legal mine field complicated contractual terms and requirements. In this article we look at 7 key points which we hope creates greater clarity in relation to the business sale process.
1. Know what you’re selling
The first point to consider in selling a business is to know exactly you’re selling. Having this knowledge will allow you to clearly convey to a prospective buyer what they will be getting in exchange for their money. This knowledge will also help you determine the sale price of your business. Forming a team constituted by an accountant, solicitor and/or business broker will assist with giving you the necessary awareness to ensure the business sale agreement encapsulates the true value of the business. In determining the value of your business the aspects that should be considered include the goodwill of the business, fixtures, fittings, furniture, chattels, plant and equipment, industrial and intellectual property, work in progress (if any), permits and licenses and any other assets required to operate the business.
2. The goodwill
The goodwill of a business is the measure of how the market views your business. Goodwill is intangible in the sense that it cannot be physically effected. For example much of the goodwill attributable to a business may be its customer base (that can’t necessarily be physically identified). Generally a portion of the sale price of your business will be attributed to its goodwill. The goodwill of a business can be undermined if for example after selling your business you set up a business of a similar nature in competition with the existing business. In view of this you should expect the buyer to impose conditions preventing you from affecting the goodwill of the business after completion of the sale. The above may be in the form of a restraint on when, where, how and if you can establish another similar business which may compete with the one you are selling. This can be a problem in particular with sole traders but can also extend to key employees within larger businesses. It should be noted that any such restraint of trade provision in the business sale contract must be reasonable. If the restraint is not reasonable the Courts will not enforce the restraint (and this aspect of the business sale agreement will be deemed invalid). Determining what is reasonable in a restraint of trade is best determined in consultation with a lawyer who drafts appropriate restraints of trade according to the law in this area.
3. Furniture, chattels, plant and equipment
As opposed to the intangible nature of goodwill the furniture, chattels, plant and equipment are the physical aspects of your business that you are selling. Anything of a physical nature (that you intend to sell with your business) should be included in the schedules attached to the business sale agreement. If there is anything of a physical nature which you do not intend to sell with the business it is important that these item/s are also outlined in your business sale agreement – so they can be explicitly excluded from the sale. This will ensure transparency with the buyer so there is not any conjecture before or after the sale. Your solicitor will be able to write special conditions into the business sale agreement which will specify these excluded items. Items associated with your business that are leased or subject to some form of license agreement should also be listed in the business sale agreement. Again these stipulations will serve to avoid confusion and possible conjecture with the buyer down the track. If there are items that are leased, licensed (ie. software agreements) or rented the contractual agreements relating to these items (ie. motor vehicles/vendor machines etc) must be transferred to the buyer on or before settlement. You should ensure that you properly understand the transfer terms of these items (by referring it to your solicitor) as you can have ongoing obligations in relation to these contractual arrangements even after these contracts have been transferred to the buyer after settlement.
4. Intellectual & industrial property
Intellectual and Industrial Property can relate to a broad range of items and aspects associated with your business. Examples of this type of property include website domain names, websites, procedure manuals, logos, trademarks, business names, patents etc. Items of this nature that are of great importance to the operation of the business should be specifically mentioned in the business sale agreement. As with the previous paragraph many of these items may need to be transferred to the buyer. Again your solicitor can give can give you specific advice in relation to these necessary transfers.
5. Permits and Licenses
The majority of businesses require some sort of permit or license to operate. As the seller of a business, one of your obligations is often to sell the business with the permits and license required to operate it. If you are not sure if your business holds the licences/permits needed to effect the sale then you should contact your solicitor who will be able to advise as to which ones you need and to assist you with the transfer of same.
6. Problems that may be associated with the Business
A business sale agreement should include provisions that provide that there are no outstanding demands against the business that may be a problem for a buyer. These demands can relate to requisitions or notices from local council or demands in relation to the premises (ie. Demands from the Landlord in relation to any outstanding rent, or outgoings etc). These demands often come from the government or other bodies that regulate the type of business which you operate (ie. Hygiene and kitchen standards that are regulated by local government). I In some circumstances these demands can be issued following an inspection of the business premises by a potential buyer (ie. The potential buyer can request same of local council etc). If there are any outstanding requisitions/demands then it is up to you to fix the defects at your cost (unless the business sale agreement provides otherwise). Your solicitor can prepare your business sale agreement to ensure that your exposure in relation to these aspects is limited.
7. Business Premises
The Business Premises is another important aspect that needs to be considered when selling your business. If there is a lease in place normally there are provisions in the lease that deal with the Landlord’s requirements for the Lease to be transferred to any potential buyer (new tenant). These provisions often provide that the Landlord’s consent in relation to transferring the lease to a third party (the buyer) is required. As the outgoing tenant the Landlord’s legal costs in relation to the cost of the Transfer of Lease may also be your responsibility. In view of the above it’s important to ensure that your lease is reviewed by a solicitor who can advise exactly what your obligations are in relation to the business premises.
Although the sale process can appear complicated with the assistance of an experienced business lawyer you should feel confident that your best interests are being looked after.
By Tom O’Brien
Tom O’Brien is the principal lawyer of O’Brien Law. Tom has extensive experience acting on behalf of business owners and potential business owners in relation to the sale and purchase of businesses. To contact Tom please telephone 0428 436 547 or send an email to: firstname.lastname@example.org (www.obrienlaw.net.au))
Disclaimer: this article is not intended legal advice but merely as a guide in relation to the business sale and purchase process.