The process of selling a business can be a complex one for business owners. Preparation is important to make the process a much smoother transition to the new business owner. It may also assist in maximising the sale price of your business.
If you are selling a business, be it micro, small or medium sized, you may be wondering where to start and what paperwork you need to sell your business.
Our commercial lawyers explain how you might prepare for selling your business. We recommend speaking to a business sale lawyer as early as possible because the process can move quickly. They can provide legal advice at each stage to ensure that you have not compromised on any rights you may have under the relevant legislation.
One of the first steps would be speaking to a broker and perhaps even seeking a valuation on your business from a business valuer. If done early enough, you can work on ways of improving the valuation of your business before you sell. Ideally a business valuation should be done prior to commencing the sales process. Doing this on your own terms can prepare you for the negotiations with any prospective purchaser later.
Some valuers are also well connected in the industry and can help connect you with a business broker or others.
A business broker will guide you on the market and how long it takes to sell a business and the level of interest you might get.
You want to make the process as simple as possible for the purchaser and have the key relevant information to hand to provide to them. Getting the paperwork and important documentation together for each stage will make the process seamless and help ease the stress of the purchaser in purchasing or taking over an existing business.
Ideally, you want to be setting up a walk-in walk-out sale as much as possible, even if you do intend to have a longer handover.
Collate an overview of the business (this is simply a guide and may not apply to all businesses):
Strengthen Business Agreements & Contracts before you sell your business
Before you start the process of selling your business you should make sure your business contracts and agreements are in order and add to the value of your business overall.
Will a potential buyer want your premises and lease, if so, is it secure? Are your supply agreements locked in? Are your terms and conditions as strong as they can be? Are your business contracts up to date? Check key employment agreements as key employees which are necessary for the continued operation and survival of the business maybe required to be transferred to the new owner
The strength of these business agreements and contracts can impact the valuation positively or negatively. A full review of the key contractor and/or material agreements is important especially if your business relies on these types of agreements to continue to operate. You also need to check if the key contractor and/or material agreements can be assigned to the new owner and if so, what are the terms of consent required from the contractor or supplier.
A commercial lawyer can help provide advice on negotiating or terminating agreements to firm up your businesses position.
Before you hand over sensitive business information you will need a non-disclosure agreement. This can be prepared by your business sale lawyer. This is particularly important if you are selling to a competitor hence a solid non-disclosure document will add a layer of protection for you.
Usually, the first thing a business purchaser will be looking at are the financial reports of the business and an overview of the financial position of the business. Prior to disseminating any financial information of your business, you would want the buyer to agree to keep such information obtained during the due diligence private and confidential.
In most businesses, the buyer will also be wanting to know how many staff you currently have; how the business operates on a day-to-day basis and whether the customers and stakeholders of the business would readily accept a new owner taking over the existing business. If the seller is critical to the success of the business, the buyer may want to retain the seller to assist them during the transition as an employee or independent contractor for an agreed period of time after settlement.
The makeup of your client base is important too. Clients and customers that are loyal to the owner and not the business will ultimately bring down the value of the business. Understanding this from the outset and being able to address this up front will help the purchaser upfront.
A heads of agreement HOA in most cases is legally binding and has legal ramifications for seller and buyer if they don’t comply. Some business sales will require a HOA and others won’t, depending on how the negotiations go.
It is an agreement signed off by the buyer and seller with the key terms that will later form part of the contract of sale.
It should be drafted, reviewed and negotiated with the assistance of your lawyer before you propose and are bound by any terms and conditions.
For business sales in Victoria where the total price of the small business is $450,000 or less, a seller is required to give the purchaser a Section 52 Vendor Statement before they sign a contract of sale or pay a deposit. A Section 52 contains important financial information about the business including the balance sheet and profit and loss statement of the business for the last two accounting periods The seller is also required to provide copies of any quarterly BAS prepared for the business since the end of the last financial year.
The Section 52 is normally prepared by the seller’s practising accountant who must sign a statement confirming that the information is true and correct in accordance with the books of the seller. There is also a declaration at the back of the Section 52 which must be signed by the vendor.
The consequences of not providing a Section 52 or where the information provided is false or inaccurate, are that the buyer has a right to avoid the contract within 3 months of signing. Avoiding means that all the buyer’s money including the deposit will need to be refunded by the seller and the contract is immediately terminated.
Business sale contracts are prepared by business sale lawyers who are skilled in drafting contract conditions and terms. Business lawyers are experience in the business sale conveyancing process and understand the common commercial and legal issues. Poorly drafted terms special conditions can be ambiguous and lead to disputes.
Most business sales commence with a due diligence stage where the business is open for the buyer to inspect. This can also be a time where the buyer is trying to renegotiate the price. It’s important to be prepared for difficult discussions and negotiations with the buyer during this stage.
Your lawyer will be helpful in providing legal advice, drafting special conditions and any further warranties from the purchaser that may be required.
Warranties are verbal or written representations made by either party during the course of negotiating the business sale.
It is important to have an expert lawyer draft such warranties and special conditions for the contract of sale to ensure that your interests, as the business seller, are well preserved. If you are a buyer, you will want to make the seller’s warranties as precise as possible to secure your position and ensure that the vendor delivers on his verbal promises to you at settlement of the sale. A skilful lawyer will need to negotiate with the other party’s lawyer in relation to critical terms of the sale as well as warranties and draft them in such a way as to protect your interests in the sale process and ensure that settlement occurs smoothly. The lawyer’s job is not to derail the business sale.
There is potential exposure to business owners selling for disputes to arise after or during the sales process. Claims for false and misleading claims can be costly. Part of our role is to help protect you and reduce your exposure to any claims or liability in the future.
One of the key business sale documents is the non-compete agreement or restraint of trade clause in the contract of sale. This provides protection for the purchaser that following the settlement of the business you will not setup in competition to them.
The non-compete agreement or restraint of trade clause usually has a timeframe and a specific territory. Defining this clearly at the outset is important as it needs to have the effect of restraining the seller from undertaking any business or activity in competition with the business, they have just sold to you. It this is not set up properly, the business you have just taken over would suffer invariably and the price you have paid will not justify the income that the business can actually generate.
Throughout the process your commercial lawyer will be a valuable resource. Our commercial lawyers have extensive experience in business sales and have helped many clients with different types and sizes of businesses sell their business.
Having clear and concise commercially sound advice is important especially when negotiating under stressful circumstances. Selling your business will be aided by our advice and experience in helping navigate any difficult situations. We can negotiate complex situations so that you are protected in the short term throughout the process and after the business sale has gone through.
Litigation and business disputes can arise after a business sale and these disputes are complex and costly. We understand the legalities and where points of contention may arise. Our team are well organised and prepared to ensure your business sale or purchase is executed smoothly.
Contact one of your lawyers today on 1300 907 335 to discuss your business sale.
Please note: The above is not intended to be legal advice. Every circumstance is different. Always seek legal advice in relation to your individual situation.
© PCL Lawyers 2022
Marilyn Wai is a Senior Associate in the Commercial and Commercial Property Department. Marilyn studied law at Monash University and...