Selling a Business

Selling a Business

Introduction

If you planning to sell a business, it is most important that you allow enough time to get the business in order.  It is also important that you get together the information that will be required to prepare the sale of business contract.  This article is divided into two parts – pre contract matters and information required for the contract.

Pre-Contract Matters to Consider when Selling Business

1.      Shares or assets

If the business is owned by a company you must determine whether it is in your best interests to sell the shares in the company or have the company sell the assets of the business.  This issue should be raised with your accountant.  Of course the purchaser may also have a view on this. 

If sale of shares check on who owns the shares and whereabouts of share certificates.

If sale of assets check which entity owns the assets.  Sometimes different assets owned by different entities and all go to make up the business being sold.

2.         Capital gains tax

You should also discuss with your accountant the tax implications, particularly capital gains, of the sale.  There are some significant capital gains tax exemptions and discounts and if at all possible you should make use of these.

3.         Assets

If an asset sale you need to consider whether the assets should be sold at written down value or some other value eg market value.

Are any of the assets leased or under hire purchase.  If so what arrangements can be made to either pay out those leases or assign them to purchaser.

Is the business subject to a charge or other encumbrance.  Any charge will have to be discharged (at least insofar as it affects assets being sold) prior to completion and you may need to discuss with lender.

4.          Stock

If stock being sold you must consider how it should be valued.  Often at cost but where raw materials have been turned into finished product this may not be appropriate.  Also consider treatment of “work in progress”.

Purchaser will probably not wish to acquire obsolete, unsaleable and damaged stock and consideration needs to be given on how best to deal with this.

5.         Due diligence

Any seriously interested purchaser will undoubtedly carry out due diligence on the business.  You should put your business to the same test that the purchaser will and ensure that everything is in order.  For example:

• ensure business names, trademarks etc are up to date;
• consider whether key business contracts are in place and if not whether written contracts could/should be entered into;
• consider lease – rent up to date? How long does lease have to go?;
• ensure employee records are up to date;
• consider whether there are or should be any service agreements with employees;
• consider whether any superannuation issues – consider whether obligations up to date, particularly if you have your own fund;
• has development consent for the business been obtained from Local Council.  If not could there be any issues with this;
• if there are problems with the business which can not be fixed up how can these best be disclosed to the purchaser.

6.       Information Memorandum

Usually a good idea to put together an information memorandum.  Important to ensure that no misrepresentations in the memorandum and that it contains adequate disclaimers eg the purchaser must rely on his own enquiries etc.

7.       Confidentiality Agreement

Before any information provided to prospective purchasers they should sign confidentiality agreement.  Make sure an appropriate confidentiality is quickly available.

Information Required for Contract for Sale of Business

1.        Basic Details of Parties etc

• Full name and address of vendor including ABN.
• If available full details of purchaser and purchasers’ solicitor’s details if relevant.

2.         What is Being Sold and at What Price

• Full list of all plant and equipment, if possible showing price apportioned to each item. 
• Details of business names, trade marks and any other intellectual property – provide copies of certificates for business names, trade marks etc.
• Details of any contact numbers being transferred eg phone, fax, email address, domain name etc.
• Details of other assets being sold eg Supply Contracts, Intellectual Property, book debts, benefit of Contracts, permits, stock.
• How is price to be split between goodwill, plant and equipment and other assets.
• Is trading stock extra or is it included in the overall price.  If extra is there a there a maximum dollar amount of stock that the purchaser is obliged to buy.

3.        Premises

• If the existing lease is being transferred please provide full   copy of lease.Also provide contact details for landlord.
• Has landlord already been approached about transfer of lease?  Note that vendor normally responsible for landlords costs of consent. 
• If lease governed by Retail Leases Act provide copy of Disclosure Statement from Lessor?
• The alternative to a Transfer of Lease is that the sale is conditional upon the purchaser entering to a new lease.  If this is relevant has the issue been raised with the landlord?

4.         Employees

• Do you have any employees? 
• If so, will the purchaser be employing any or all of the employees? 
• If so, full names, positions, dates of birth, commencement dates, salaries, long service leave entitlements, superannuation arrangements etc for those employees.

5.         Licences/Permits

Details of any licences or permits relevant to business.

6.         Franchise

Is the business a franchise – if so it will be necessary to have detailed discussion on franchise arrangements.

7.         Restraint/Non Competition

Is the vendor agreeing not to compete against the purchaser and if so for what time period and in what geographical area.  If the vendor is a company are certain key people agreeing not to compete against the purchaser and if so who and for what time period and in what geographical area.

8.         Vendor Training

Are you providing the purchaser with any free completion or post completion training.  If so details.

9.         Vendor Warranties

Under the standard contract the vendor warrants (promises) certain things including:

• Business and its assets not subject to any charge or encumbrance – If this is not the case must consider how any charges/encumbrance will be paid out.
• Equipment is in proper working order.
• No breach of existing Lease.
• Vendor has complied with all relevant legislation.
• No current dispute or litigation relating to the business.
• Any superannuation fund is funded, solvent and complies with legislation

If there are any issues with any of these warranties further discussion is required.

For further information please contact David Beale on (02) 9957 3685 or dbeale@rbhm.com.au