KEY 10 TIPS FOR BUYING OR SELLING A BUSINESS

KEY 10 TIPS FOR BUYING OR SELLING A BUSINESS The Business Sale Transaction Toolkit.

TABLE OF CONTENTS

1. Introduction Why do I need to know this stuff?

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2. Who gets involved?

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3. Preparation is everything! What documents are required?

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4. Going concerns. What are they, and why are they important?

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5. Important advice for the buyer Look before you leap and do your due diligence!

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6. Exchange of contracts. What is it and when does it happen?

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7. Between exchange and settlement, what happens and why?

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8. Settlement Ready Set Go!

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9. What does a succesful sale of business transaction look like?

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10. A checklist of deal breakers and nightmares!

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INTRODUCTION - WHY YOU NEED TO KNOW!

With over 30 years' experience in legal practice and as business owners we've come to understand that the sale of a business is seen by many to be a complicated, often difficult, and sometimes frustrating experience. To make it a success for all concerned and avoid traps and disputes in a business sale I decided to create this booklet for your benefit. At the outset it is important to understand the following: •

The sale of a business is a different animal to a conveyance of land. It requires an experienced business lawyer, and preferably also a proactive accountant, to help you get a successful outcome.

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Your professional team should be there to achieve a successful transfer of business, not complicate the matter, so choose wisely.

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Make sure you obtain good quality financial and tax advice as well as legal advice about the transfer BEFORE you sign the contract.

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Knowledge is power and knowing what succeeds and what fails in a sale of business will better equip you to understand the process and proactively implement it. This brochure has been prepared with your success in mind.

PRIORITY BUSINESS LAWYERS - KEY TEN TIPS FOR BUYING OR SELLING A BUSINESS

WHO GETS INVOLVED? STAKEHOLDERS IN THE TRANSACTION

"In some

It is important to understand that it is not just the vendor and purchaser who are involved in the transaction. Other players are: • The broker • The lender, usually a bank • The landlord if there are leased premises • The accountants for both parties • The employees of the business for sale • The franchisor, for a franchised business •

The State, Federal, and local governments

In some transactions, all these players have a role and can assist or hinder the process. So, what does this mean for the parties to the sale? The seller consults with: • •

• •

• •

The broker, to assist with the transaction where required. The landlord, to do the groundwork required to have the buyer approved as a tenant and deal with any current tenancy issues. The accountant, about the structuring of the transaction and apportionment of price. If a franchise, with the franchisor about any franchise issues and the acceptance of the buyer as a franchisee. The lender, if there are any securities registered against the business. Finally, the lawyer, to prepare the contract and transact the matter.

The buyer consults with: • • • • •

The broker, to ensure all terms of the sale are agreed up-front and accurate. The accountant, to confirm the structure of the purchase and apportionment of the price. The lender, to ensure finance is approved from the get-go. The franchisor or landlord, where there are premises involved, to seek approval. The government bodies who regulate any relevant licences or approvals required, to obtain them and expedite the transfer.

transactions all stakeholders can assist or hinder the process. So what does this mean for the parties to the sale?"


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WHAT DOCUMENTS ARE REQUIRED UP-FRONT? KEY DOCUMEN TATION

KEY DOCUMEN TATION

The seller – being ill-prepared is a recipe for delay and disaster!

The buyer - – you are not prepared to start looking at the contract until you obtain advice about your purchasing structure.

The key document is the Contract for Sale and the attachments required. If you are selling, you should deliver to your lawyer and broker the following: • • • • • • • • • • • • •

The ASIC business name registration and ASIC Key Your ABN and GST registration information Your lease Inventory of plant and equipment PPSA security documents Employee details Stock estimate Licences required to run the business Details of landlord Your franchise agreement Details of your accountant Financial reports Trademarks and IP documents

Once your lawyer obtains all these documents, they can prepare the contract.

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What is that, you may say. • • • •

Sole trader (a real person such as yourself) Partnership of individuals, company, or trust Private company Trustee of a family or unit trust

Then you should supply the following to your lawyer: • • •

Details of the purchasing structure Your ABN/GST registration Details of your finance to purchase the business

Landlord requirements, including: • •

Two business/accounting references A brief statement of your assets, liabilities, and financial resources

GOING CONCERN - WHAT IS IT AND WHY? Normally, a business is sold as a going concern and is thus GST-free, but only if you meet all of the following requirements: • • • • •

The buyer is registered or required to be registered for GST and has an ABN. The buyer makes a payment for supply. The seller and buyer agree in writing that it is a supply of a going concern. All things necessary to carry on the business are supplied by the seller. The seller carries on the business as usual until supply occurs.

See GST ruling GSTR 2002/5 and the checklist on the ATO website if you need more information about this. If there is no going concern supplied, then the price will increase by the amount of the GST on it, normally passed on by the seller to the buyer.

"Normally a business is sold as a going concern and is thus GST-free, but only if you meet certain requirements."


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IMPORTANT FOR THE BUYER: Look before you leap! - The importance of due diligence. The old legal phrase ‘caveat emptor or ‘buyer beware’ is alive and well in the 21st century when it comes to buying a business. Most contracts will have clauses in their special conditions putting the onus on you as buyer to discover any defects or problems with the business before exchanging contracts. So, what enquiries should you make at this stage? At least the following: • • • •

ASIC searches on the seller PPSA searches on the seller Title searches on property that the business occupies Local council enquiries in respect of approvals to run the business and use property for it IP Australia searches regarding any trademarks or registered intellectual property

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But it doesn’t end there. There are also practical enquiries that can assist you, such as checking for defects or problems with plant and equipment or IT. Normally you would arrange for experts to report on these for you. Any problems found can be addressed by negotiating changes PRIOR to exchange, because afterwards is usually too late.

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EXCHANGE! What is it and when does it happen? Exchange is when the seller and the buyer exchange signed contracts binding each party to the sale agreement. • Due diligence is completed. • Finance is approved in writing. • Contract terms are agreed upon. • Ideally, the landlord and/or franchisor have approved the buyer as tenant and/or franchisee. • Exchange is usually the ‘point of no return’, after which the sale is definitely going ahead.

BETWEEN EXCHANGE AND SETTLEMENT The Vendor • • • • • • • •

Obtains an ASIC key and consent to transfer number, if not already held. Replies to a list of specific questions sent by the buyer's lawyer about the business, called ‘requisitions’. Arranges for the release of all relevant securities. If a transfer of lease or licence is involved, arranges for and signs all relevant documents. If a franchise is involved, arranges for and signs documents required to either transfer or terminate the agreement. Informs employees that the business has been sold and makes arrangements for the buyer to interview them. Informs suppliers and key customers or clients about the sale, preferably by joint letter with the buyer, and arranges introductions. Calculates relevant adjustments for rent outgoings, employee entitlements, and the like.

The Buyer • Sends the requisition questions to the vendor. • Signs all relevant agreements and licence applications. • Arranges to obtain all government documents required to run the business, for example liquor licence, footway licence, compliance certificates, and approvals. • Organises interviews with employees and introductions to suppliers and clients. • Prepares the settlement figures for final settlement. • Arranges transfer of funds from the bank account or financier. • Submits the Deed of Restraint to the vendor for execution. You are both now ready to settle!


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SETTLEMENT – READY, SET, GO! IF ALL PREVIOUS STEPS HAVE BEEN COMPLETED YOU CAN SETTLE. Essentially, this involves an exchange of money for documents in either hard copy or electronic formats. It is important to ensure that everything necessary to run the business is transferred to the purchaser. Otherwise it can cause disaster on a number of levels. If there is no going concern supplied, then the price will increase by the amount of the GST on it, normally passed on by the vendor to the buyer. Some of the possible pitfalls are addressed below.

Post-Settlement Matters There are some matters that require attention after completion of the sale. The vendor needs to: • Assist the purchaser with the business, if contracted to do so. • Arrange for lease documents to be returned to the landlord. • Pay the business broker the commission owed. The buyer needs to: • Register the transfer of the business name with ASIC. • Pay rent to the landlord and franchise fees to the franchisor. • Attend to transfers of relevant licences. • Arrange for lease and franchise documents to be signed and returned by the landlord and/or franchisor. • Arrange for employees to enter into new employment agreements.

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WHAT DOES A SUCCESSFUL SALE OF BUSINESS TRANSACTION LOOK LIKE?

PRIORITY BUSINESS LAWYERS

Business Sales / Purchase Process

Brokers Sales Advice

Due Diligence Finance Negotiations

Exchange Point of no return

Administrative Matters

Settlement

Post Settlement

Requisitions

Vendor Assistance

PPSA

Retention Period

Business name transfer

Debtors/Creditors

Training Purchaser

Transfers of Lease/Licenses

Employees Introduction

Lease/Franchise documents finalised

Suppliers/Customers Introduction

Lease/Licenses Transfer or New Deed of Restraint


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A CHECKLIST OF DEAL-BREAKERS & NIGHTMARES Both sellers and buyers should note that bad outcomes occur if any of the following happen: The buyer fails to: • • •

Organise finance Undertake due diligence Have landlord and/or franchisor consent to transfers.

The sellers fails to: • • • •

Have all documents available at the outset. Engage with key stakeholders such as franchisor and landlord early on. Disclose key issues or problems with the business. Obtain releases of all securities affecting the business.

Or if any of these uncontrollable outside factors are in play: • • •

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Slow landlord or solicitor. Unreasonable third parties. Difficult banks or other secured creditors.


Priority Business Lawyers is a progressive and innovative law firm aiming to change the way legal firms work with clients. At Priority Business Lawyers we have a team of lawyers with a variety of skills and backgrounds to provide you with specialist legal services. Disclaimer: The content of this booklet is a summary of information only, provided by Priority Business Lawyers under licence from the copyright owner David Prior, and is not intended to be relied or acted upon by you or any person. None of the content of this booklet constitutes legal advice and you should consult your own legal or financial adviser if you require legal or financial advice about the subject matter of the booklet. Priority Business Lawyers shall not be liable for any loss or damage (including consequential, indirect, or special loss) that any person may suffer as a result of relying or acting upon any of the contents of this booklet. Copyright Notice

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