Selling or Buying a Business? Follow our 8 Essential Steps
Selling or buying a business usually indicates exciting things. For the purchaser, buying a business often presents an exciting opportunity to follow a long-held passion, exercise leadership or gain a meaningful investment. For the seller, it’s a great opportunity to reap the benefits of all the hard work building up the business before retiring or following new business ventures.
While the whole process is undeniably exciting, it can be long, confusing and often stressful. At Butlers Business Lawyers, we understand how overwhelming selling or buying a business can be, therefore, we have created an eight-step manual to help guide you through the sale/purchase process.
Step 1: Initial discussions between the seller and purchaser
When a purchaser finds a business they want to buy, they must come to an agreement with the seller on a few key terms. These include settling on a sale price, the maximum amount of existing stock the purchaser must accept and the assets that are included in the sale.
The seller will also have to decide what portion of the sale price is for plant and equipment and what portion is for goodwill. This apportionment is important as it can have tax consequences down the track.
Its important that the purchaser conducts due diligence checks on the business to assess the value of the business and any risks that may be present.
Step 2: Drafting the contract
Once the parties have come to an agreement on the key terms, the seller should engage a solicitor to draft a business sale contract. In order to draft this agreement, the solicitor will need to know a range of details about the business. These details can vary greatly depending on the size, location, and industry of the business. Below is a list of the more common details that are likely to be requested:
The seller’s solicitor will want to know details of any intellectual property that is transferring with the business. This includes business names, product names, domain names, websites, emails, telephone numbers and so on. Clarity about what intellectual property is being retained and what is being transferred will prevent arguments down the track.
The seller’s solicitor will want to know what stock is to be included in valuations and what is to be excluded, as well as the method of valuation and who will undertake the valuation.
When it comes to employees in a sale of business, there are two options:
- The employees transfer with the business to the new owner; or
- The employee’s employment with the business ends.
The seller will need to provide details of transferring employees including years of service, wage, employment classification and eligibility for long service leave. Any employees who are not transferring will need to be paid out their entitlements.
The purchaser may or may not recognise any transferring employees prior service. If the buyer elects to recognise prior service, the seller will need to pay the purchaser for the employee’s entitlements. If they don’t, the seller will need to pay the employees out.
Note: Irrespective of whether the purchaser elects to recognise service, the seller should pay the purchaser any long service leave entitlements for eligible transferring employees. This is because NSW long service leave legislation doesn’t consider the change of business owners to be a break in the employee’s service.
At this stage in the process, only the details of employees are required, actual payments are dealt with later in the process and are explained below.
Once the contract has been drafted, it is sent to the purchaser for review.
Step 3: Negotiations
The purchaser should engage a solicitor to assist with the purchase. The solicitor will go through the draft contract and discuss it with the purchaser. The solicitor will suggest edits or additions to ensure the contract promotes the purchaser’s interests and provides necessary warranties and protections. After these discussions, the purchaser’s solicitor will negotiate the terms of the contract with the seller on the purchaser’s behalf. This stage usually involves some back and forth between the parties to fine tune the contract so that it protects both parties and promotes their interests.
Step 4: Exchange
Once the terms of the contract have been agreed upon between the purchaser and the seller, each solicitor will meet with their respective party and engage them to sign the finalised contract. Once the contracts are signed, they usually can’t be varied, and each party is bound to the contract.
After the respective contracts are signed, the solicitors will organise a time to meet and will exchange the contracts with each other so that each party has a copy signed by the other.
At this stage of the process, the purchaser is usually required to pay the seller a deposit.
Step 5: Pre-settlement obligations
The contract will specify certain pre-settlement obligations that both parties must fulfil. This can involve a myriad of things such as:
- Continue business in the ordinary and usual course
- Maintain goodwill
- Maintain stock levels
- Hold a closing down sale
- Maintain equipment in the same state of repair
- Take steps to transfer any business names, trademarks and domains
- Release securities
- Organise to transfer any licences or leases
Step 6: Lease considerations:
If the business operates from a shopfront or similar premises, either the existing lease will need to be transferred to the purchaser, or a new lease will need to be entered with the landlord.
There are multiple important considerations that must be taken into account when entering or transferring a lease. The purchaser’s solicitor will be able to go through the lease with the purchaser and explain the effect of any clauses and the best way forward.
If the seller owns the premises, they will need to have a lease drafted. Its important to understand that the Retail Leases Act 1994 (NSW) applies to some commercial leases. If the Act applies, the seller has several extra obligations they must fulfil. Failure to follow these requirements can result in penalties. The seller’s solicitor will be able to tell the seller whether the Act applies and advise them on compliance requirements.
Step 7: Settlement
The date of settlement is the date that the transaction is finalised. The seller’s solicitor will usually produce a settlement adjustment sheet. This document will list all payments made by the seller, such as council or water rates, that cover any periods after the business changes hands. The sheet will also contain details of any transferring employee’s entitlements and any other payments that either party is required to make to the other under the contract. The sheet will also deduct any deposit already paid from the purchase price. The purpose of this document is so that the purchaser only has to make one single payment, rather than money passing backwards and forwards between the parties multiple times.
On settlement day, the seller will give the purchaser all the documents relating to transfer of ownership. They will also need to provide any records of the business including contact and client lists as well as any keys and security codes.
If there is a lease, the executed lease or executed transfer will need to be provided to the seller.
When the purchaser pays the seller and receives the keys and documents in return, the purchase is finalised and the purchaser becomes the brand-new owner of the business. At this point, both parties finally get to enjoy the rewards of their hard work.
Step 8: Post-settlement obligations
Often, the sale contract will specify that the seller must provide some form of post-settlement training or guidance for the purchaser.
If there is a new lease involved, it is likely that it will need to be registered within 28 days of settlement taking place.
Why is it so important to engage a skilled solicitor when selling or buying a business?
If you’ve made it through this guide to selling or buying a business, then you probably have an idea of how complex the sale/purchase process is. On top of this, every business is vastly different, and every buyer and seller have different expectations, desires and needs.
Selling or buying a business is a huge deal. If you’re selling, its imperative that the sale adequately rewards you for the sweat, blood and tears that likely went into building and growing the business. As such, it’s vital that the sale is handled by a competent solicitor. A skilled solicitor will be able to streamline the process, saving you from unnecessary legal costs and mountains of stress. A good solicitor will also ensure that the contract adequately protects your interests and binds the purchaser to act appropriately.
If you’re buying a business, then you’re essentially gambling a lot of money on the purchase. A good solicitor will totally remove any of the guess work from the process. They will assist with due diligence to ensure that the business you are buying is a sound investment. A skilled solicitor will scrutinise your contract to ensure it’s legally sound. They will be able to provide you with expert advice that will save you money now and in the future. Mishandled business sales and purchases almost inevitably wind up in expensive back-and-forth arguments where neither party is the winner. It’s often the case that one party becomes so discouraged by the process that they walk away from sale, costing both parties in legal fees and loss of potential investment.
Our solicitors at Butlers Business Lawyers provide expert legal advice and assistance in both business sales and purchases. We can assist with streamlining the sale/purchase process and will negotiate on your behalf to ensure your expectations and needs are upheld in the sale agreement. We will endeavour to save you costs wherever possible and will handle the process smoothly so that you can relax and enjoy the excitement that comes with a sale or purchase.