This article is the first instalment in our two-part series covering the purchase and sale of businesses. Over these two articles, we will consider some of those matters that might ordinarily arise in the three stages of a purchase or sale of business:
- formation of the agreement;
- execution of the transaction;
- post-settlement matters and disputes.
Today we will consider the first two stages of the process.
Stage 1: From negotiation to formation of an agreement
An agreement to buy and sell a business can be formed in a multitude of different ways. Sometimes our clients have advertised their business for sale online, sometimes a long-term employee might buy in to part of the business or take it over entirely from an outgoing owner. Sometimes a business will be purchased from within the family to buy-out a sibling or through the course of a marriage breakdown. Sometimes a larger company or competitor comes along to buy you out to reduce their competition. In whatever way it happens, there comes a point in time where the general conversations between the buyer and seller become more specific and the terms of the transactions begin to take shape. If it has not happened already, this is certainly the time where both a buyer and seller should be seeking legal advice.
Don’t sign anything before speaking to a lawyer
Often, we find clients have jumped the gun too soon and signed off on a binding legal agreement, entirely unaware of the magnitude of putting pen to paper. In Western Australia there is no statutory cooling off period for the purchase of a business (or a house for that matter), except for franchise establishment situations. When a contract is signed, it will generally remain as is, and so you should turn your mind to a number of considerations before making or accepting an offer to purchase or sell a business. These considerations go far beyond the immediately obvious questions of sale – the price, the settlement date and so forth. These questions extend to include considerations such as purchasing entities (should the buyer be a company or a trust rather than an individual proprietor?) and also whether it would be wisest to buy or sell the shares in a company as opposed to the assets that comprise the business. How about the transfer of the lease or the major contracts of the business – do they transfer? There are a great number of matters to consider before a contract (and even an offer) can be crafted.
Putting thoughts to paper – the beginnings of your contract
Having settled on terms by which you are happy to proceed, there is then a selection of methods by which the transaction can be progressed from idle chatter to something of greater certainty. At the simple level, some businesses are transferred by a mere agreement on a price and a handshake. At other levels, there are teams of accountants and lawyers scouring over many years of financial documents and contracts, performing their ‘due diligence’ to ensure the viability and security of a transaction. The reality for most SME’s is something in the middle. Often the personal relationship between the buyer and seller will dictate the way in which a sale is formally documented.
The standard procedure is on a formal “offer and acceptance”. That is, one party puts together an offer of the terms and conditions that they think necessary to effect the transaction and signs and forwards that written offer to the other party for consideration. If accepted, the offer is signed. All things being equal, we would then have a binding contract and be ready to move to stage 2 of the process to effect the actual transfer.
Realistically, the negotiation process will be slightly more prolonged than a simple offer and acceptance – there can often be a number of counteroffers where each party will seek to adjust either minor or major terms of the sale to better reflect their needs and wishes. Extensive back and forth on the terms of sale, can become time consuming and expensive. So to keep the negotiation on a ‘big picture’ level, sometimes the parties may first choose to negotiate upon and enter into a document called a Heads of Agreement.
While not necessary to the purchase and sale process, a Heads of Agreement can be a simple method of broadly outlining the major terms that the parties have agreed upon upfront before moving forward with a more complete and formal sale contract. By agreeing on the principal matters in contention the parties create a mutual understanding on how the sale should proceed which can be particularly valuable in a more complex sale and purchase. Often a Heads of Agreement will include wording to indicate that the document is ‘non-binding’ as a formal contract will follow to govern the sale.
The formal contract
Once the negotiations are complete and a formal sale contract has been drafted and signed by the parties, then the ‘rules’ for the settlement and the official transfer of the business have been established. The contract can be so specific as to designate the exact date, time of day and even place in which the handover takes place. Depending on the business, however, it is not as simple as handing over a cheque for the purchase price and receiving the keys to the front door.
Stage 2: From contract to Handover
Leading up to settlement there are a number of matters to attend to in order to pass over effectual control in a business.
The following are just some examples of the steps in the process that may need to be met in order to actually effect the practical change in ownership:
- Stock valuation – If a business holds stock there will need to be a stock take to determine the final quantity and value.
- Transfer of employees – While this will have been considered in the contract, it can often be weeks and even months until settlement. If there are employees terminating with the sale or transferring then there will need to be adjustments made to the purchase price to consider the value of any employee entitlements.
- The Lease – If there is a landlord then there will need to be an assignment of the lease or the drafting of a new lease.
- Franchises – If there is a franchisor then the franchisor’s consent will be required before the sale can be finalised and franchise agreements reviewed and signed.
- Relevant licenses – If the business holds any licenses such as a pharmacy, a food business, or a liquor business then notifications and applications for the change of ownership in the business will apply.
- Creditors and Debtors – It is best to clear these matters prior to sale, however, the reality of business is that the outgoing seller may have provided services that they are not paid for prior to the sale of the business. These debts either need to be adjusted for, or a system established for their collection.
- Personal guarantees – A seller will want to formally terminate any personal guarantees connected with the business.
- Business Name transfer – A unique code needs to be arranged with ASIC for the transfer of the business name.
- Key codes, alarms and passwords – Where contracted for and relevant, there needs to be an exchange of this information to allow the business to continue running.
- Transfer Duty – While not a precondition to sale, the buyer needs to lodge the contract with the Office of State Revenue and pay any relevant transfer duty.
The purchase and sale of a business can be conducted swiftly and simply provided that you obtain legal advice early and negotiate in a practical, straightforward and good faith manner. Not only will this bode well throughout the course of completing the sale and effecting settlement, this, along with a well drafted contract, will protect you from any recourse by the other party in the rare occasion where a settlement goes rotten and there are disputes down the track.
To ensure your business purchase and sale runs smoothly, both prospective buyers and sellers should contact us to see how we can assist.
About the author: This article has been authored by Steven Brown who is a Perth lawyer and director at Lynn & Brown Lawyers. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.