The purchase or sale of a business can be the fulfilment of dreams of freedom. So, what are the key things to be aware of?
A Vendor must not be misleading or deceptive in their conduct and statements when selling a business. Failing to disclose information or disclosing inaccurate information may result in a Purchaser seeking a range of remedies. So, a vendor cannot:
– Misrepresent the value of the business; or
– Mislead or deceive the Purchaser regarding any element of the transaction.
A Purchaser should obtain advice from professional advisers including lawyers and accountants. A business may be purchased in the name of a sole trader, partnership, company or trust depending on your circumstances. Aspects of taxation and asset protection must be considered at the commencement of any proposed business purchase.
It is best if parties enter into a Non-Disclosure or Confidentiality Agreement prior to commencing negotiations.
Further, any sale and/or purchase should be detailed in writing identifying what is expected from each party including what they must do, how much is being paid, when they must pay and what is being transferred. It may be necessary to have completion of the contract subject to various conditions.
A few common provisions that are often inserted into a contract of sale in order to protect a buyer include:-
– Cooling off – Gives a Purchaser time to change their mind after signing the contract;
– Finance – The Purchaser can back out of the contract if they cannot obtain finance;
– Minimum trading levels during a trial period;
– Transfer of lease; and
– Financial Due Diligence.
It is common practice for the Vendor to prepare the Contract of Sale.
As a Purchaser, you must know who owns the business and if they have a legal right to sell it. If multiple parties own the business, it is important to know who owns the different parts. The Vendor must have the right to sell and not be under a financial disability such as bankruptcy.
Vendors must also be satisfied the Purchaser has the financial resources to complete the sale.
When dealing with a Company or Trust Vendor it is common to join the Purchaser as parties to the Contract for the purpose of giving warranties and guaranteeing the obligations of the Vendor and/or entering into restraints of trade.
When buying or selling a business you are transferring ownership of rights and assets used to generate a profit. All parties to the transaction must be clear as to what is being bought and sold. The following is a short checklist of what may or may not be included in a contract for the sale of a business:
– Business names;
– Business goodwill;
– Business premises (lease or ownership);
– Plant, equipment and fixed assets;
– Current orders;
– Permits and licenses;
– Supply records and agreements; and
– Intellectual property.
When buying or selling, the following are usually considered fundamental:
Goodwill – Goodwill is the value of the reputation of your business and may be the most valuable item of a business. Goodwill may include reputation, business, product and service names, client base and contact details. Purchasers should exercise diligence in determining what these components of goodwill are worth and whether they are already registered. If the parties cannot determine the value of goodwill, it may be necessary to seek an independent valuation.
Premises – The right to use existing premises may be an integral part of the business and its goodwill. If the premises are subject to a lease then the Purchaser must be sure that they can obtain the rights to the use of the premises either through a transfer of the Lease, a new Lease or through the purchase of the property. A thorough review of the Lease is essential, and it may be desirable to enter into a new Lease.
Assets, Plant and Equipment/Machinery – The Vendor should complete an inventory of assets, and plant and equipment of the business before settlement. It may also be necessary to include a list of Excluded Assets. The Purchaser should determine if this is in a state of good repair and the goods are still under warranty. Other assets might include confidential information and intellectual property.
Stock – Stock in trade includes all commodities used in the production of goods, goods being produced and finished goods. Whilst the stock value is generally an estimation. The Purchaser should determine the accurate value of the stock and a stock take should be undertaken prior to settlement.
Mortgages, Company Charges or Encumbrances – Encumbrances are not included in the value of the business. Prior to the sale, the Vendor must settle any mortgages, charges or other encumbrances over any stock or assets. Unless previously agreed to, a Purchaser should not take over existing business liability. Various searches must be made to ensure these obligations can and will be settled.
Industry Requirements – It is important to ensure a Purchaser is aware of industry and general requirements affecting the business. Appropriate industry bodies or the local council may be helpful in obtaining additional information. It may also be necessary to speak to a relevant professional for insurance advice for your particular industry.
Employees – The Purchaser must determine if they will retain any of the existing staff. It may be that the continuing goodwill of the business is dependent upon the existing staff. It may be that a Contract of Sale of Business is conditional upon the retention of certain staff. Staff lists are required to be handed over by the Vendor to assist in making these decisions.
In the absence of an express agreement, a Vendor may approach the business’ clients after the business is sold or compete with the new owner provided he does not breach any duties of confidentiality. A Purchaser may, in certain circumstances, restrict a Vendor by agreement from competing with the business, therefore protecting its goodwill. Common restrictions sought include limiting the Vendor from conducting certain work in a particular geographical area for a specified period of time and/or limiting the Vendor from approaching the clients or employees of the business.
Such restrictions will only be enforceable if they do not constitute an unreasonable restraint of trade. Reasonable will not go beyond what is sufficient for the adequate protection of the new owner’s business and not damaging to the Vendor or public interests or is anti-competitive.
The Courts have recognised that a Purchaser may have a legitimate interest in ensuring that clients or customers are not enticed away, and that Vendors do not abuse confidential information.
Buying or selling a business is exciting yet inherently involves uncertainty.
Both Vendor and Purchaser must communicate to ensure they both understand and agree on the details of the Agreement. Whether as a Purchaser or Vendor, it is strongly recommended business advisers, including accountants and lawyers, are involved in the process, to ensure rights and obligations are respectively protected and honoured.