Why your Business Sale Contract Should be Drafted/Reviewed by a Lawyer

This piece was written by Gavin McInnes and shared on Kev Ryan’s Linkedin profile. Kev Ryan is a QLD-based expert in Accounting Practice Mergers, Sales & Acquisitions. 

Regardless of whether you are selling or buying a business, it is essential that the details of business sale contract and any heads of agreement accurately and clearly set out the terms of the sale of the business as negotiated by the parties. A business sale contract which has been drafted and reviewed by a lawyer will help to minimise risks, avoid disputes between the parties and allow for a timely settlement of the matter. In addition, there are a multitude of considerations that need to be taken into account when structuring the transaction and drafting the relevant documents to reduce the likelihood of unintended consequences such as increased capital gains tax liability, the unavailability of the going concerns exemption, the imposition of stamp duty, the unintended transfer of liabilities or simply no legal transfer a particular asset used by the business being affected under the contract.

Unlike a conveyance of property, the process of buying and selling a business is often complicated by issues including but not limited to leases, intellectual property rights, third party contracts, employees and their entitlements, personal property security interests and regulatory licenses. A lawyer can draft and review your business sale contract to ensure the business sale contract appropriately provides for:

·      any conditions precedent that may be needed such as finance, satisfactory due diligence (both financial and legal) or the transfer of a particular licence;

·      the transfer of the business name and intellectual property at settlement;

·      the transfer of plant and equipment at settlement;

·      the price of existing stock to be included or adjusted for in the final settlement price;

·      sufficient warranties to protect you from liability and/or claims both during the transaction and after settlement;

·      an appropriate restraint of trade to prevent direct competition with the business following settlement;

·      appropriate indemnities to be given by the buyer and seller in respect of the operation of the business before and after settlement;

·      tuition from the seller on running the business;

·      the transfer of client lists and business records at settlement;

·      the transfer or termination of employees and their respective entitlements at settlement;

·      the assignment of licenses and permits required to operate the business;

·      a transfer of the lease; and

·      any other considerations which may be unique to your matter.

Failing to have a contract reviewed by a lawyer can have costly consequences, for example, in a recent decision of the Supreme Court of Victoria[1], the inclusion of the word “GST” as opposed to “plus GST” was not enough for the seller to receive the purchase price plus GST. This resulted in the buyer not having to pay GST in addition to the purchase price and the seller is now liable to pay GST in the amount of $290,000.00.

Similarly, in an Administrative Appeals Tribunal case[2] the date of heads of agreement was found to be the date that the business was disposed (rather than the date that the business sale contract was executed) with the effect that the vendor became liable for capital gains tax and lost out on hundreds of thousands of dollars in tax concession savings that could have been achieved had the vendor obtain appropriate legal advice.

Numerous other cases demonstrate the pitfalls of poorly drafted contracts and in particular the reliance of standard form documents which are not compliant with legislation, contain clauses which may in fact be unenforceable and do not accomplish what the parties actually intend.

The above highlights a number of key issues, including:

·      The cost of not having a lawyer review and draft your business sale contract can be significant;

·      A lawyer will draft a business sale contract to suit your circumstances with a view to minimising risks and addressing potential consequences that you may not have considered;

·      care needs to be taken when using standard form contracts to ensure that the agreement actually accomplishes what the parties intend, is up to date and that the specific circumstances of the matter are appropriately dealt with; and

·      The cost of getting the terms and conditions in your agreement right in the first instance will likely save you headaches, time and money.

A Rostron Carlyle lawyer can advise and guide you through the selling and buying process from contract negotiation, drafting and reviewing the contract, conducting due diligence through to settling the matter in a timely manner with minimal risk. Contact us for more information.

[1] A&A Property Developers Pty Ltd v MCCA Asset Management Ltd [2016] VSC 653.

[2] AAT Case [2013] AATA 76.

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