Buying or selling a business is a major decision for both the seller and the buyer and can be a daunting and exciting process. Regardless of whether you are a seller or buyer, it is important you take into account a number of considerations and steps when preparing for the sale or purchase of a business, during the negotiation of the sale or purchase of the business and prior to signing a contract of sale.
Although the sale and purchase of each business will be different depending on the circumstances specific to that business and sale, the following list sets out a brief outline of what can be considered the top 5 things that a seller and buyer should consider when selling or buying a business:
- What are you selling? What are you buying?
Buying or selling a business is the process of transferring some or all of the assets of the business from the seller to the buyer. Accordingly, it is important for the seller to work out what they are selling and for the buyer to know exactly what is up for sale and what they are buying.
A seller will need to consider:
- Are you selling the entire business including all the assets?
- What assets do you not want to sell?
- Are you selling the business name?
- Are you selling all of the intellectual property of the business?
For a buyer, it is essential that you know what you are paying for.
- Preparing for a sale and purchase
Prior to purchasing a business, a prospective buyer should commence a due diligence investigation. A buyer will usually request certain documents to review such as financial accounts, copies of material contracts with customers and suppliers, corporate registers and intellectual property registrations. From a buyer's perspective, this process is critical to ensure there are no legal or financial factors which may impact the value of the business and their purchase of the business and to identify any issues that may need to be addressed prior to the sale of the business.
Consequently, once a decision is made to sell a business it is important for a seller to conduct a 'health check' to determine any legal 'gaps' to be addressed to satisfy a buyer's due diligence investigations. 'Gaps' can include: 'undocumented' material customer agreements, supplier contracts or leasing agreements; inadequate intellectual property assets protections, including intellectual property licences; deficient employment agreements; or licences and permits not being up to date. Good preparation early will make the negotiation process with prospective buyers a lot easier.
During the due diligence investigation or discussions the seller has with potential buyers, confidential information about the business may be exchanged. It is therefore important that Non-Disclosure Agreements be entered into in order to prevent any 'walk away' potential buyers from using the sellers and the businesses confidential information for their own benefit.
- Employees
A seller will need to ensure that all employment arrangements are in order as during the due diligence investigation, a buyer will be looking to see if employees have been paid the correct amounts and checking which award and classifications within the award apply to the employees.
As a result of a sale of business, an employee will either transfer across to the buyer (the new employer) or their employment will be terminated due to the sale of the business. Either way, a seller will need to give notice to an employee terminating their employment with the seller and comply with employment laws, such as notice and entitlements. Therefore, a seller may want to put together a plan to communicate the sale of the business to employees so as to avoid 'office gossip'.
If the employees are transferring to the buyer, the buyer should seek advice on employee entitlements, including those that they must recognise and others that they do not have to recognise.
- Intellectual Property
When considering what assets a business has and if these assets will be transferred, a buyer will need to identify if any intellectual property is being transferred and included as part of the sale. Intellectual property of a business can include trade marks and logos, websites, domain names and email addresses, trade secrets, know-how, designs and copyright.
Intellectual property rights may be valuable and offer a commercial advantage. Therefore, as a buyer you want to see how these intellectual property assets are owned, if it be assigned to you or whether the seller has the right to licence or assign a licence of the intellectual property to you. To assist with this sellers will want to look to register any trade marks and ensure that licence agreements are in place and can be assigned to the buyer.
- The Contract of Sale
Each sale of a business will have certain terms specific to the sale and accordingly it is important to get a lawyer to draft the contract of sale if you are the seller or review the contract of sale prior to signing if you are the buyer.
A contract of sale can include essential terms that, for example, can restrict a seller from trading in the same or similar business after the sale of a business, provide that certain conditions must be met before a the sale of the business can be completed or provide for personal guarantees from the directors of the seller or buyer guaranteeing that the seller or buyer will comply with the contract.
It is also important to remember that each state or territory may have special requirements that you need to follow as a buyer or seller and therefore, you should seek independent advice from a lawyer prior to entering into the contract of sale.
For example, in Victoria, when selling a small business at a price up to $450,000, the seller or their accountant will need to prepare a Section 52 Statement setting out the financial performance of the business over the last 2 years and provide this to the buyer before the contract of sale is signed.
Above all, seek advice
Selling or buying a business can be stressful. However, if the rights steps are taken during the preparation, negotiation, drafting of the contract of sale and the settlement of the business, both the seller and buyer can mitigate any risk and walk away with a successful outcome.
Professionals, such as brokers, lawyers and accountants, can help you navigate through a sale or purchase of a business, including helping you understand any risks, preparing and providing advice on the sale, drafting the contract of sale and providing advice on any legal and government requirements for the sale or purchase of the business. There are many potential issues with the selling or buying of a business and therefore you should seek advice prior to making an offer if you are the seller or signing a contract of sale if you are the buyer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
