Selling your business during a global pandemic – What’s involved on the legal side?
Selling a business can be a long and detailed process at the best of times, let alone when the world is enduring a global pandemic which is affecting everything from your coffee shop down the road to the international economy. Selling a business involves not just you and your employees but also professional advisors such as your broker, valuer, accountant and lawyer. There are many decisions which you will need to make and in order to simplify this process below are the 5 steps which are needed to sell your business.
1. Preparing to sell
The first step in selling your business is preparing the business for sale, determining what it is you are selling and what is the realistic price range you are looking to achieve.
At this stage you should be engaging with your accountant and lawyer to obtain advice on your exit strategy including whether you should be structuring the sale as a share sale or an asset sale and the different tax implications of these approaches. The structure of the sale is important as taxes can have a large impact on the amount you actually receive from the sale as well as whether the business is attractive to potential purchasers for instance by allowing a purchaser to claim the GST going concern exempt and avoid having to pay GST on top of the purchase price.
During this time, you should also be considering what will be the key terms of the sale including:
1. The purchase price range you are targeting
2. Whether you are selling the whole or part of the business
3. Whether you are retaining any intellectual property or assets?
These key terms should be communicated to potential purchasers as a starting point for negotiations and it should be made clear that the transaction is subject to a formal agreement being drafted and executed by the parties.
Purchase price range
The purchase price range you are targeting is important given if the price is too high, potential buyers may not make an offer and if you price it too low you may not achieve the best possible price. In determine the price range we recommend that you engage a valuer or discuss this with your accountant to calculate a reasonable and realistic price. As part of this, you will need to ensure your figures are maintained and are attractive to a potential buyer. Generally, potential purchasers will want to go over the financial statements of the business before they will make an offer and generally this would cover a period of between 1 and 3 financial years.
Advertising your business
Once your business is ready you will need to start advertising your business for sale which can be done via, brokers, websites, newspapers and trade publications. During this time, you may also receive enquiries for further information (such as the finances noted above) and we recommend that before you provide any information you should have the potential buyer sign a confidentiality agreement. Additionally, whenever providing information or making a representation to the buyer care needs to be taken to ensure that the information true and correct to avoid any claims of false and misleading conduct.
2. Negotiating and executing the contract of sale the deal
When negotiating the sale of your business with the buyer, both of you will need to come to an agreement on the key terms of the agreement which should include:
4. the purchase price;
5. the amount of the deposit (commonly 10% of the purchase price) and when this is due;
6. the date of settlement
7. whether the contract will be made subject to certain conditions such as finance, licence transfers, lease assignments or due diligence and if so the time period in which these conditions need to be satisfied;
8. whether the stock is included in the purchase price or whether a stock take is required;
9. the transfer of employees;
10. the liabilities and contracts to be assumed by the acquirer;
11. the terms of any restraint of trade on the seller; and
12. what assets are included or excluded from the sale.
Your lawyer will be able to assist you in the negotiation of the terms of the sale of your business and will be able to draft a contract of sale setting out all of the terms agreed, listing the assets the buyer is purchasing, listing any contracts the buyer is assuming (e.g. service contracts or leases), the warranties given under the contract, what employees are transferring, how and what adjustments will be made to the purchase price together with protections for the seller in the event that the buyer defaults.
Once the terms of the contract are finalised the parties will then execute the contract and the buyer should pay the deposit to the seller or an agreed deposit holder within the time period specified in the contract.
Between the date the contract is signed and the date of Settlement, the parties will usually need time to work towards settlement by signing various documents, organising for the assignment of or new agreements with third parties such as landlords, employees and service contractors, the release of security interests registered over the business, applications for licences and permits, obtaining finance and completing any due diligence enquires. The duration of the pre-settlement period is usually around 30 days but in simple matters there may be no pre-settlement period and for more complex matters the pre-settlement period can continue for up 2 – 3 months.
At settlement your lawyer will either physically or electronically finalise all of the obligations in the contract of sale by handing over all of the required documents, keys, transfer agreements and releases to the buyer in exchange for payment of the purchase price. On the settlement date, the parties also agree on the settlement statement which specifies the purchase price and any adjustments required under the contract. Common adjustments include:
1. adjustments of outgoings on the lease;
2. adjustments for payments for goods or services received in advance;
3. adjustments for employee entitlements; and
4. the value of stock where stock is not included in the purchase price. This is normally agreed between the buyer and you as part of a stock take occurring the night before the settlement date.
When both parties are satisfied that everything required to be supplied under the contract at settlement has been supplied, the transfer of the business will be complete and the buyer will officially take over the business.
After the sale is completed there may be ongoing obligations between the parties such as an obligation on the seller to provide tuition to the buyer, the lodging of documents with government and/or statutory bodies to record the transfer of the business or pay stamp duty. It is recommended that a copy of the contract of sale and/or any other key documents are kept in a safe place as a record of the sale transaction for at least 7 years.
A final note
It’s crucially important that both throughout the sale and post-settlement that all parties keep themselves savvy to any new government regulations which could affect contractual agreements or asset valuations.
How can we help?
The Rostron Carlyle Rojas Lawyers team pride themselves on remaining on the forefront of changing laws and regulations amid COVID-19. If you are looking at selling or buying a business or would like further advice in relation to the sale of a business, please contact the team at Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at [email protected].