HOW TO SUCCESSFULLY SELL A BUSINESS… The Contract Stage

commercial contracts

When it comes time to sell your business you want to ensure that you get a good offer and that the sale goes through smoothly. You do not want your business to be one of the many of thousands of businesses that do not sell or sell for considerably less that you had hoped.

Working with professionals that are experienced in business sales will help but as the Seller you have a huge part to play in the successful sale of your business.

Understanding the process and what is involved is crucial to achieving a successful business sale.

There are essentially 3 MAIN STAGES OF SELLING A BUSINESS

  1. Getting your business ready for sale
  2. The Contract Stage
  3. Settlement

Understanding what needs to happen in each of these 3 stages and being well prepared before you embark on each stage will help to ensure a successful business sale.

This article deals with Stage 2 when the parties enter into the business sale agreement…

Stage 2 – the Contract Stage

So your business broker has done their job and found you a Buyer. Next you need to lock the Buyer in with a binding contract. This is called a business sale agreement.

The Contract Stage is arguably the most important stage of the business sale transaction as this will sort out the time wasters and create the legally binding agreement with the person who, until now have merely expressed an interest in buying the business.

Here are some things that should be covered during the contract stage of your business sale transaction:

Document all agreed commercial terms: If you have used a business broker, chances are you will have signed a non-binding Expression of Interest – alternatively if you have engaged a commercial lawyer early on in the piece (perhaps to assist with your Seller Due Diligence) they may have prepared a Heads of Agreement.

These pre-contractual agreements will document the main commercial terms of the offer put forward by the Buyer for example, parties, price, settlement date, and conditions which need to be satisfied before the business sale can be completed (such as the Buyer requiring finance approval or allowing the Buyer a period of time in which to conduct its due diligence).

Negotiate other terms of sale: The business sale agreement will cover other important issues that will not yet have been agreed between the parties when making the initial offer. These will get fleshed out between the Seller and their lawyer who will recommend the best course of action and then negotiated with the Buyer’s solicitors. In our experience these will include things such as:

  • Period and geographic area of the Seller’s Restraint of trade
  • Employee Entitlements
  • Apportionment of Purchase Price

The contract conditions need to be well drafted and tight enough so as to reduce any wriggle room the Buyer might otherwise have.

Attachments/matters to be included in contract: Sellers need to ensure that they have everything they need to complete the business sale agreement, for example all schedules, as it is preferable to send across a complete first draft contract to the Buyer. These include:

Asset lists:

  • A list of the business’ physical assets (a plant and equipment list), usually in schedules separating out those which are unencumbered, leased or subject to rental agreements (it is advisable to include a specific list of Excluded Assets also).
  • any contracts for the equipment you have leased will need to be provided.

Intellectual property: List all IP such as trademarks, websites and social media accounts.

Lease: The registered version of your lease, including copies of your current invoices for rent and outgoings and insurance policies.

Licence and Permits: Federal, state and local licenses and permits that are required to run your business. For example, liquor licences, food and waste permits, footpath licences all need to be attached to the contract.

Employees list: Details of each employee’s name, position, pay and entitlements. You may want to consider providing a redacted list until the business sale goes unconditional.

Regulatory requirements:

Businesses operating within certain industries will have specific requirements upon the transfer of the business – where the licence/permits also needs to be transferred for example:

  • Liquor Licenses
  • Service approvals for childcare centres
  • Bed Licences being transferred by approved providers of aged care services

And approvals – such as Landlord’s approval and franchisor’s approval need to be included as well as mechanisms to ensure the Buyer plays their part in obtaining these approvals.

Exchange of Contract

Once the business sale agreement has been agreed the parties then sign it – this is known as exchange of contract.

The Buyer is required to pay the deposit to the person nominated in the contract as the ‘Deposit Holder’ on the signing of the contract. Sometimes Buyer’s solicitors negotiate a longer period in which to pay the deposit (for example 2 Business days).

The contract is now binding and you and the Buyer are under an obligation to proceed towards settlement.

Contract Obligations

Once the contract is signed and the deposit is paid there is still a lot of work to do to make sure that the business sale goes unconditional and then settles. You can’t crack open the champagne just yet!

Your solicitor should send you a copy of the signed contract together with a list of key dates and obligations of the parties. The parties must ensure that they meet key dates and are doing what they need to do to make sure that they do not breach their obligations under the contract.

Assignment of Lease

It is in this period between signing the contract and settlement that the assignment of lease will be negotiated with the Landlord. The Seller will need to follow the lease requirements and make a formal request to assign the lease and send the Landlord all the details they require to assess the Buyer. They will generally want to see

  • The Buyer’s identification documents (e.g. driver’s licence or passport);
  • Details of the Buyer’s financial position (e.g. list of current assets);
  • A history of the Buyer’s business experience (e.g. previous businesses, years in the industry, employment history); and
  • Business references (e.g. professional referees).

Often the Landlord will require the Buyer to enter into a new lease.

If the Landlord is happy to allow the Buyer to come on board in place of you as their new tenant they will instruct their solicitor to prepare the new lease or deed of assignment of lease.

If you need any assistance with your business sale or purchase, or with any other commercial legal issue please contact Helen Kay at helen.kay@riselegal.com.au or call 0402 318 033 for a free no obligation chat.