Business Purchase/Sale

There may be a number of reasons behind the decision to list your business for sale. Whether you face a new career opportunity, a change in personal circumstances or simply an offer for the business that is simply too hard to refuse, however, you will want to sell quickly. It is important that you understand how a sale of business works, so you can communicate effectively with the purchaser and ensure a smooth process. This article will explain how the sale of business process works.

The Sale of Business Process: An Overview

With any business sale, there are many decisions you will need to make with the purchaser. Ultimately, you will set out all aspects of the sale in the formal business sale agreement. However, it is important that you consider and agree to all of the key issues beforehand. Some of these issues may seem obvious but they can lead to stress and delay if you fail to raise them until a late stage. 

For example, you may need to agree on:

• equipment included in the sale;
• intellectual property to be transfered; 
• including customer history and purchase details;
• contracts to be transferred (including leases, franchise agreements, client agreements and client management software);
• contact details for the business (including domains, phone numbers and social media);
• which stock to include;
• how you will deal with employees and who will pay out any entitlements;
• any licences and permits that need to be transferred (e.g. a food business licence);
• how you will transfer financed or leased equipment (i.e. buy-out or transfer arrangement);
• what training you will provide to the purchaser; and
• whether you will provide a post-sale restraint of trade (i.e. a restriction on your ability to operate a similar business after the sale).

Key Stages of the Sale

Pre-Contract

Initially, you should discuss all of the key aspects of the business with the purchaser. It is important to know whether you can transfer the valuable aspects of the business to the purchaser. If not, the purchaser may ask you to lower the purchase price. If you have engaged a business broker, they will carry out this task. They may also have you sign a heads of agreement. This is a short agreement that sets out the main commercial terms of the sale. It is typically non-binding, meaning that you will still need to sign a formal business sale agreement.

Due Diligence

The purchaser may request to see your:

• financial records;
• contracts; and 
• other business records. 

This process is called due diligence. To protect the confidentiality of this information, you can:

• enter a non-disclosure agreement; or 
• include confidentiality obligations in the heads of agreement. 

It is also common to include a due diligence period in the business sale agreement. This allows the purchaser to review certain material for a period of time after signing the business sale agreement. If they uncover something that concerns them, they can end the agreement and withdraw from the sale.

Drafting the Contract and Negotiation

Typically, your lawyer will draft the business sale agreement. This contract forms the basis for any negotiations. The draft will then be provided to the purchaser’s lawyer and certain aspects will be negotiated. Although there are often several rounds of negotiation, you can reduce the length of this process by coming to an agreement on key issues as early as possible.  

Signing and Exchange

Once you have agreed on all issues and finalised negotiations, both you and the purchaser will sign the sale contract. The purchaser typically pays a deposit (usually, around 10% of the purchase price) upon signing wither the business sale contract or the heads of agreement. If the purchaser withdraws from the purchase with no good reason, they will often need to forfeit this deposit to you.

Settlement/Completion

At this point, ownership of the business and assets transfer and the purchaser pays the balance of the purchase price. There is often a period of time between signing and completion. The length of time will depend on:

• the conditions precedent; and 
• other obligations in the contract that you must satisfy prior to transferring ownership of the business.

Post-Completion

It is common to have obligations that continue after you formally transfer the business upon completion. These obligations may include:

• training the purchaser;
• being employed in the business; and 
• introducing the purchaser to suppliers or customers.  

Conditions Precedent 

In almost all sale contracts, there will be events which must occur before you can complete the sale. These events are called conditions precedent. Typical examples include:

• the purchaser receiving unconditional finance approval (where the purchaser is borrowing money in order to pay the purchase price);
• the landlord consenting to the purchaser becoming a new tenant of the business premises; 
• key employees entering into employment agreements with the purchaser;
• the franchisor consenting to the purchaser becoming a franchisee; and
• key contracts receiving the consent of the other party so they can be transferred.

You will need to allow enough time for you and the purchaser to complete any conditions precedent. How long this takes will vary between different business sales, but it can often take longer than you originally anticipate. 

This can apply to transferring other aspects of the business as well.  Planning for this process in advance can prevent this process becoming too lengthy.

Landlord and Franchisor Consent

In many business sales, you will need to obtain your landlord’s or franchisor’s consent. This means that they approve the purchaser as a tenant or franchisee. Both will need proof of the purchaser’s strong financial standing and relevant business experience in order to provide their consent. You should make sure that you understand and discuss any specific requirements. If a potential purchaser does not meet these requirements, starting the sale process may be a waste of time. Although the franchisor or landlord cannot unreasonably withhold their consent to a transfer, it is a legal battle that you should avoid.

Key Takeaways

The sale of business process can be time-consuming. Agreeing on all aspects included in the sale from the outset can help ensure a smooth process. Transferring each aspect of the business will involve a different process and may require the involvement of both you and the purchaser. Delays can occur if you do not understand your obligations and comply with them at each stage of the process.