At some point in the business cycle, thoughts will go to the sale of the business. This will come about from necessity and the natural cycle of business.

Selling a business is rarely just about agreeing on a price. In practice, a seller also needs to think carefully about what is actually being sold, what must be disclosed, what promises are being made to the buyer, and what needs to happen before settlement can occur. The contract materials in this matter show how many moving parts there can be in even a relatively straightforward business sale.

Here are the top 10 things from our experience that a seller should be aware of when selling a business.

Be clear about exactly what is being sold

One of the first issues in any business sale is identifying the assets included in the sale. The standard sale conditions describe the business assets broadly as including goodwill, fixtures, fittings, furniture, chattels, plant and equipment, intellectual property, work-in-progress, permits, licences, stock-in-trade and other assets listed in the contract, while excluding specified excluded assets.

A seller should not assume that “the business” is self-explanatory. The contract should clearly state whether the sale includes:

  • goodwill;
  • plant and equipment;
  • stock;
  • work-in-progress;
  • intellectual property;
  • licences and permits;
  • website, domain name and social media accounts; and
  • business records and operational documents

If something is not intended to pass to the buyer, it should be expressly excluded.

Understand whether the sale is “walk-in, walk-out” or not

Where a business involves stock and work in progress, careful attention is needed to ensure there are proper methods to value any stock and work in progress to ensure full value is obtained at settlement without creating issues with the buyer.

A contract that may be designated as “walk in walk out “assumes that all stock and work in progress is included in the purchase price.

A contract will need to have conditions to deal with how stock and work in progress is valued so that there is certainty for settlement to occur smoothly.

Due diligence can delay or derail the deal

It is typical for sale of business contract to have due diligence conditions for the buyer to investigate the business.

A buyer’s due diligence usually includes:

  • financial records;
  • customer and supplier arrangements;
  • licences and approvals;
  • employment matters;
  • contractor arrangements;
  • lease documents;
  • plant and equipment; and
  • compliance issues

If the seller is slow to respond, has incomplete records, or has not properly documented the business, the buyer may lose confidence or seek amendments, price reductions or termination rights. It is critical to have all potential issues relating to the business sorted before it is marketed as the due diligence process will generally uncover it and cause a buyer to think twice if the issue has not been resolved.

The seller’s warranties and disclosures matter

Under the standard conditions of most business contracts, the seller gives important statements and warranties, including that the seller owns the business, that the business assets will be free from encumbrances at completion unless disclosed, that necessary licenses and approvals have been obtained, and that trading figures and financial data disclosed in the contract are true and correct in every particular unless otherwise disclosed.

This is a risk area for a seller. If information given to the buyer is inaccurate, incomplete or misleading, the buyer may have rights to terminate or claim damages depending on the nature of the breach.

A seller should carefully review:

  • financial information provided to the buyer;
  • asset schedules;
  • licence and permit details;
  • lease information;
  • employee and contractor information; and
  • any statements made by the agent during negotiations

Encumbrances and PPSR issues need to be dealt with before settlement

Careful thought is required around the encumbrances, security interests and the PPSR related to the business as business assets is to vest in the buyer free from encumbrances or restrictions on completion.

For a seller, this means it is important to identify early whether any plant, equipment or other business assets are:

  • financed;
  • leased;
  • subject to retention of title arrangements;
  • charged to a lender; or
  • recorded on the PPSR

If these issues are not resolved in time, settlement can be delayed or in some circumstances trigger rights of termination.

Lease and premises issues can be critical

Even where the commercial terms seem settled, premises issues can become a major obstacle. Where the business operates from leased premises, the landlord’s consent is required to transfer the lease to the buyer. This is a process that takes time and should be managed carefully. The landlord can impose reasonable conditions for any transfer and in some cases refuse consent.

All lease documents and bond and bank guarantee, maintenance records and details should be keep updated so that it is easy to find and disclose to the buyer in a timely fashion.

A seller should therefore confirm early:

  • whether the premises are leased, licensed or owned;
  • whether landlord consent is required;
  • whether there are arrears or breaches;
  • what bond or bank guarantee is held; and
  • whether all lease documents are complete and available

Employees and contractors need careful handling

The timing of when the sale is made known to staff and how to communicate it is a delicate balance. Staff can become nervous if there is change in ownership. Key employees need to be carefully managed during the sale period. Generally, they are not told until the contract is unconditional.

Proper records and reports should be complied for ease of review for any buyer.

Consideration should be made as to the employee entitlements and the percentage that should be adjusted at settlement.

Poor handling of employee or contractor issues can affect both due diligence and completion.

Intellectual property and digital assets are often overlooked

Contracts should include website addresses, domain names, social media accounts, usernames and passwords, as well as intellectual property more generally.

In many businesses, these assets are commercially significant. A seller should check:

  • who legally owns the website and domain;
  • whether trademarks are registered;
  • whether social media accounts are controlled by the business;
  • whether passwords and access credentials are available; and
  • whether any third party has rights over branding or content

If these matters are not organized and collated properly, it may impact on the value of the business

Restraint obligations can significantly affect the seller after completion

Proper consideration should be given to any restraint that a buyer may want.  Restraints generally stop the seller and its directors and shareholders from competing with the business, soliciting employees or contractors, dealing with recent customers, or using the business’s intellectual property or confidential information without consent

This is a key issue sellers sometimes underestimate. A restraint can affect:

  • future employment;
  • consulting work;
  • involvement in related businesses;
  • dealings with former clients; and
  • use of know-how, branding and confidential information

A seller should understand exactly what restraint is being agreed and whether it is commercially workable.

Settlement is not just payment of the balance price

Settlement involves much more than handing over the keys and receiving the money. The standard conditions require delivery of transfer documents, releases of encumbrances, records, contracts, licences, and documents needed to put the buyer into full possession and enjoyment of the business

The seller may also be required to assist with introductions to customers, clients and suppliers to preserve goodwill

There may also be post-settlement tuition obligations, with the seller to provide assistance for a period after settlement

In practical terms, a seller should prepare for settlement by ensuring:

  • all transfer documents are ready;
  • asset schedules are accurate;
  • licences and approvals are available;
  • records can be handed over;
  • passwords and access details are organised;
  • any agreed training or handover support is documented; and
  • all encumbrances are ready for release.

Final thoughts

A business sale can look simple at headline level — price, deposit and settlement date — but the sale process and documentation means that there is real risk in disclosure, due diligence, assets, staff, lease arrangements, restraints, and settlement mechanics.

For a seller, the best protection is to be organized early, seek proper advice to ensure the contract accurately reflects the deal, and carefully review every warranty, disclosure obligation and completion requirement before signing.