Business Owners Should Always Be Ready To Sell Their Business
Whether you’re considering selling your business in the near future or not, having it ready for sale should be a thought that lingers at the back of your mind throughout its entire lifecycle.
Actually coming to sell a business is a pivotal moment in an entrepreneur’s journey. It’s the culmination of years of hard work, dedication, and strategic planning.
This article is designed for business owners and entrepreneurs who want to ensure they are fully prepared when the time comes to sell their business. It underscores that readiness for sale isn’t just a consideration for those immediately planning to sell. Instead, it’s a strategic mindset that should be present throughout every phase of a business’s existence.
When it’s time to sell your business, you want to ensure it fetches a good offer and the sale proceeds smoothly. Understanding the three main stages of selling a business is essential:
Stage 1: Getting Your Business Ready for Sale
Before you even consider listing your business for sale, it’s crucial to ensure that it’s in the best possible shape to attract potential buyers and secure a favourable sale.
Here’s a comprehensive look at what you should do:
- Sellers Due Diligence: Consider engaging a commercial lawyer to conduct a Sellers Due Diligence. This early investigation allows you and your advisors to thoroughly assess your business, its assets, and its relationships. It’s a proactive measure to identify and address issues that could deter potential buyers down the track. As a bare minimum, you should be looking at:
- Business Name and Trademarks: Ensure that the business name is registered under your ownership. Similarly, verify the ownership of any trademarks associated with your business. Buyers need the assurance that they’re acquiring the legal rights to these assets.
- PPSR Charges: Review any historical PPSR (Personal Property Securities Register) charges on your assets. Clear any old charges, so you won’t need to provide complex covenants or delay settlement.
- Key Contracts: Document all your key contracts. Handshake agreements hold little value in a business sale. Put all significant customer and supplier agreements in writing. This not only adds security but also enhances your business’s value.
- Lease Matters: If your business operates from leased premises, address any lease-related issues. Buyers might scrutinise the lease terms and conditions and be less than satisfied with what they find. Be prepared to negotiate with your landlord and consider adding further terms for example.
- Comprehensive Review: Depending on your business’s nature, consider a more detailed Seller’s Due Diligence. This can involve a deep dive into aspects like employment contracts, supplier arrangements, client agreements, and necessary licenses and permits.
- Financial Preparation: Collaborate with your accountant to review your business’s financial aspects. Ensure your financial records are in order, and there are no delays or discrepancies that could raise concerns for potential buyers.
Stage 2: The Contract Stage
Once you’ve prepared your business for sale, and a potential buyer has made an offer to purchase, you’ll move on to the Contract Stage. Here, the main objective is to create a legally binding agreement between you (the seller) and your buyer. This stage involves several crucial steps:
- Document Commercial Terms: Early on, you might sign an Expression of Interest or a Heads of Agreement with the buyer. These documents are generally expressed to be non-binding and outline key commercial terms such as the parties involved, the purchase price, the settlement date, and any conditions or due diligence periods.
- Negotiate Additional Terms: Beyond the initial commercial terms, the business sale agreement will cover other vital issues that may not have been agreed upon initially. These can include:
- Restraint of Trade: Determine the period and geographic area of any restraint of trade clauses. These will prevent you from competing with the business after the sale.
- Employee Entitlements: Clearly outline how any transferring employee entitlements will be handled.
- Purchase Price Allocation: Allocate the purchase price to various assets or components of the business.
- Attachments: Ensure you’ve compiled all the necessary attachments that should be included in the contract. These can encompass:
- Asset Lists: Prepare a comprehensive list of your business’s physical assets. Differentiate between those that are unencumbered, leased, or subject to rental agreements.
- Intellectual Property: Include a list of all intellectual property, such as trademarks, websites, and social media accounts.
- Lease Documents: Attach a copy of your current signed lease agreement. You will also need to provide but not attach related documents like invoices, rent agreements, and insurance policies.
- Licenses and Permits: If your business requires specific licenses or permits to operate, attach these documents.
- Employees List: Provide details of each employee, including names, positions, pay rates, and entitlements. Consider if these should be redacted until after the contract is signed
- Regulatory Requirements: Depending on your industry, there may be specific regulatory requirements to fulfil during the business transfer. These can include liquor licenses, food permits, or health and safety certifications. Include these requirements and approvals in the contract.
- Exchange of Contract: Once both parties have agreed upon the terms and conditions, you’ll sign the business sale agreement. This moment marks a significant step, as it binds both parties to the sale.
- Deposit Payment: The buyer typically pays a deposit upon contract signing. This deposit is usually held by a nominated entity until settlement. The contract should outline the deposit payment details, including when and to whom it’s paid.
- Key Dates and Obligations: Your solicitor should provide you with a copy of the signed contract, along with a list of key dates and obligations for both parties. Meeting these dates and fulfilling obligations is essential to ensure the contract proceeds smoothly.
Stage 3: Settlement
With the contract in place, you move to the settlement stage, where the final transfer of ownership of your business takes place. Here’s a detailed look at what happens during this critical phase:
- Transferring the Lease: If your business operates from leased premises, much of the settlement preparations revolve around the lease transfer. You’ll need to enter into a Deed of Assignment, officially transferring the lease from you to the buyer. Ensure, where possible, that you’re released from all lease-related obligations post-settlement.
- Business Name Transfer: Business name transfers occur through ASIC Connect. You’ll need to provide the buyer with a consent-to-transfer number during settlement.
- Business Licenses: If your business holds licenses required for its operations, these must be transferred to the buyer. License transfers can be time-consuming, so ensure you allocate sufficient time for this process.
- Plant and Equipment: If you own the business’s plant and equipment, they’ll typically transfer automatically to the buyer at settlement. However, leased or hire-purchased equipment may require additional steps. Be prepared to liaise with the relevant equipment owner for transfers and the release of any associated securities.
- Employee Matters: Regardless of whether employees will be terminated or transferred to the buyer, ensure:
- Employees are properly informed of the impending sale and their status.
- Employee entitlements, if applicable, are accurately calculated.
- The buyer is fully aware of any employee entitlements.
- Transferring Business Contracts: third-party agreements, such as supplier and customer contracts, may need to be transferred to the buyer or terminated as per their respective provisions. Each contract may have unique transfer conditions and notice requirements, so initiate this process as early as possible.
- Settlement Statements: Agree on settlement adjustments with the buyer. This can involve matters like rental payments, stock values, and other financial adjustments. Ensure that both parties are clear on these adjustments.
- Stocktake: If the purchase price includes stock, you may not need to conduct a stocktake. However, if stock is not part of the sale, calculate the value of your remaining stock. This is often done through a stocktake process, where you and the buyer assess the stock’s value.
- Settlement Day: On the day of settlement, the actual transfer of business ownership occurs. If all the necessary preparations have been completed accurately, settlement day should proceed smoothly. You’ll receive the purchase price from the buyer, and you’ll hand over the keys to the business, along with any required documentation.
Remember that while the stages of selling a business can be complex, with careful planning and professional assistance, you can maximise the chances of a successful sale and ensure a smooth transition of ownership.
This article outlines the key considerations and actions necessary at each stage, emphasising the importance of thorough preparation and adherence to legal and regulatory requirements in the process of selling a business. Getting a good support team around you that includes a commercial lawyer is crucial.
Get in Touch
If you want to know more about how the team from Rise Legal can assist you with getting your business ready for sale then get in touch! Click here for a free call.
Disclaimer: This blog post is intended for informational purposes only and should not be considered legal advice. Consult with a qualified commercial lawyer for personalised advice related to your specific circumstances.
Related article: Terms and Conditions
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