Selling a business is one of the most consequential transactions a business owner will undertake. Whether you are cashing out to release the value you have built up through years of hard work, cutting your losses from a venture that has not gone as well as you hoped, or simply moving to a well-earned retirement, you want to make sure that you extract the best possible value. As importantly, however, you want to know that when you complete the sale, as far as possible that is “it” – you can move on with no loose ends to come back and trip you up.
Achieving that outcome requires careful thought and planning in advance. It doesn’t matter how complex the business, or how large or small the sale price, the issues to be dealt with are remarkably similar.
What are some of the factors you need to take into consideration when selling a business?
– Assets and equipment – Lease agreements – Inventory and stock – Terms and conditions of the sale agreement – Employee obligations & entitlements – Customer contracts, deposits & prepaid work – Supplier contracts – Intellectual property & confidential information – Business liabilities & debts – Warranties, guarantees & indemnities – Transfer of licences & regulatory approvals – Course of action for any issues arising post-settlement – Recourse if buyer defaults on payment – Tax structure – Risk minimisation – Non-compete clauses –
Each of these elements need to be addressed both with clarity and accuracy in all relevant documentation.
Any omissions or confusion may result in financial or legal challenges.
You can’t assume that anything will “just happen” as a natural consequence of the transaction – you have to make it happen. For instance, if you have paid rent in advance under your lease, don’t assume that the managing agent will automatically make the necessary adjustments to the rent. In most cases they won’t, and you will have to make sure that happens.
The starting point is a robust sale agreement that deals clearly and unambiguously with the key issues. One the most common causes of post-sale legal disputes, and one of the most easily avoided, is ambiguity around the terms and conditions of the sale agreement. This is why it is integral to ensure that the contract is comprehensive and deals clearly with all rights, obligations and expectations, such as: what business assets are included in the sale, price and payment terms, terms and conditions, handover requirements, risk minimisation/management, any post-settlement restrictions, warranties, indemnities, dispute resolution procedures, and what happens if the buyer fails to proceed.
A properly structured agreement can ensure that all legal and regulatory requirements are fulfilled, that all valuable intangibles are properly protected upon transfer, that the sale is balanced from both the buyer and seller perspective and last, but certainly not least, that the seller is protected from any ongoing liability around problems that may arise after the buyer takes control.
What are some of the potential legal pitfalls when selling a business?
- Contract risks. These include unfavourable or incomplete contracts, unclear scope of scale with regards to inclusions, a less-than-optimal deal structure or less than favourable terms and conditions outlined by the potential buyer.
- Potential future liability risks. These include undisclosed or misallocated liabilities, misleading or inaccurate information such as lease obligations, employee entitlements, breach-of-contract claims and the failure to fulfill statutory or disclosure duties.
- Transfer and completion errors or omissions. These include missing third-party consents such as lease or supplier arrangements, the incomplete transfer of essential business elements such as key assets or contracts, as well as any Personal Property Securities Register (PPSR) registrations that may restrict the transfer of ownership of business assets.
- IP, privacy and compliance risks. These include failing to transfer IP such as trade marks, customer lists, software, branding and more, ensuring adherence to all required privacy, consumer and industry regulations and minimising the chance of any breach by shareholders, partners or directors in their duties.
There are a number of “template” sale agreements on the web, and AI will always help you – enthusiastically, if not accurately. You need to be confident that the template you are using is appropriate for your jurisdiction (whether NSW or elsewhere) and that it reflects current legislation affecting your jurisdiction. By contrast, the Law Societies in most states and territories produce template Business Sale Agreements that are comprehensive, up-to-date and straightforward, and for most lawyers these are the “go-to” documents for all but the most complex or unusual business sales.
Understandably, you will want to minimise the amount of your sale proceeds that you have to pay away to professional advisors – in fact, if possible, to avoid it altogether. However, an investment in the assistance of experienced professionals, who have been down this path many times before, can help you maximise the value you extract for your business, and shield you against expensive disputes in the future.
These advisors may include a business broker to help you find a buyer for your business and obtain the best available price, an accountant to ensure the most tax-efficient sale structure and outcome, a lawyer to help with the contractual aspects, and a financial adviser to guide you on managing your funds after you exit the business. In the end you may not need all (or any) of these, but they are worth considering, to ensure your business sale provides you with a positive outcome and strong start to your post-business future.