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Early Legal Considerations
To ensure that a Business Sale Contract can be promptly submitted to your eventual buyer following negotiation of a price and sale terms, you should consider the following and provide us with early instructions to address any matters and/or to prepare a draft Business Sale Contract, when you have decided to sell your business.
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You should ensure that you have a signed (and preferably registered) Lease of any premises from which your business is carried on that is capable of being assigned to your buyer. Alternatively, if your Lease is due to expire and/or you have not exercised any option to renew, you should approach your Landlord and endeavour to negotiate the terms of a new Lease to be granted to your company (if a buyer cannot be found in the short term) or to be granted to the buyer of your business directly on completion.
Please note, in most cases, we recommend that you do not introduce a prospective buyer to your Landlord until after a Business Sale Contract has been signed (see below).
You should ensure that any other Continuing/Supplier/Distribution/Franchise Agreements that are significant to the business have adequate remaining terms and are capable of assignment to the buyer. If no continuing right under such an agreement can be assigned, your buyer may require that an assignable right be granted as a condition of completion or may use that circumstance as a basis for negotiating a lower price.
Effective Everyday Business Contracts
Unless you are selling a retail business that does not extend credit to Customers, you should ensure that your business has established contracting procedures that result in the making of clear and enforceable everyday business contracts effectively incorporating comprehensive Terms & Conditions of Trade. Your ability to negotiate an adjustment for Accounts Receivable or unbilled Work in Progress will depend on how good your contract documents and contracting procedures are.
If your business does not already use Credit Applications for recurring customers or otherwise makes contracts incorporating comprehensive Terms & Conditions of Trade that have been prepared specifically for your business you could benefit from one of our Effective Business Contract Document Packages.
Download our Guide to Making Effective Business Contracts today for more information or call us.
Making effective everyday business contracts will also help you improve or maintain your cashflow and profitability, which ultimately will be matters that influence the price that a purchaser is prepared to pay.
Inventory of Plant & Equipment
Prepare a detailed Inventory of Plant & Equipment that is to be sold with the business. This will help avoid delays in preparation of a Business Sale Contract once the price and sale terms are agreed.
Capital Gains Tax (‘CGT‘) & Price Apportionment
Obtain advice from your Accountant in relation to the tax payable on any capital gain that you will make. We will need your instructions in relation to how the price is to be apportioned between Goodwill and Plant & Equipment. This apportionment will likley affect the capital gains tax you will have to pay.
Normally, the amount apportioned for Plant & Equipment should be equal to the current written down value of your Plant & Equipment for tax depreciation purposes (unless your Accountant advices otherwise). Your Accountant will be able to provide you with a Tax Depreciation Schedule with this amount. This is so that no capital gain is made in relation to the sale of the Plant & Equipment, and that instead, the capital gain is attributable to Goodwill in respect of which capital gains tax is assessed more favourably.
You should ensure that any intellectual property rights that you intend to transfer with the business remain properly protected, are registered in the name of the proprietors of the business or are otherwise capable of being transferred with the business. These intellectual property rights include business names, trade marks, design rights, patents, copyright, domain names, phone numbers and email addresses.
Again, a prospective buyer may elect not to proceed with the purchase if important intellectual property cannot be transferred or may use that circumstance as the basis for negotiating a lower price.
If you employ key persons whose continued employment would likely be a condition of any buyer purchasing the business, you should consider making a fixed term Employment Contract with that employee so that their continued employment can be more confidently assured for the buyer. Similary, you should consider making Employment Contracts with key employees containing reasonable restratins for trade and confidentiality provisions.
If there is a risk of such a key employee not continuing with the business following the sale, or worse still, starting a competing business using the business’ confidential information, that risk will likely be identified during the buyer’s due diligience and may then be used as the basis for trying to negotiate a lower price.
Please note that you can not simply insist that an employee simply sign an Employment Contract. You should seek legal advice in relation to your particular circumstances.
What will you do when a prospective buyer requests access to Confidential Information about your business? Using a Non-Disclosure Agreement will prevent a prospective buyer to whom Confidential Information is disclosed from lawfully disclosing that information to a third party or using it for any purpose other than deciding whether to buy your business.
Introducing Landlords & Franchisors
You should carefully consider when it is appropriate to introduce your prospective buyer to your Landlord or, if your business is a franchise, the Franchisor. Preferably, this introduction should occur after the buyer enters into a formal Business Sale Contract. This is because an earlier introduction may result in the prospective buyer deciding not to proceed with a purchase, for example, because they perceive that your Landlord/Franchisor may be difficult to deal with or that there is an unresolved dispute in relation to the Lease/Franchise Agreement.
When a Business Sale Contract has been signed by a buyer:
- In most cases your Landlord/Franchisor may not unreasonably withhold consent to an assignment of the Lease/Franchise to that buyer.
- The buyer cannot decide not to proceed with the purchase merely because they later determine that the Landlord/Franchisor is not a person that they want to deal with.
There are, however, always execeptions to preferred practice, for example, where a Lease/Franchise Agreement has or is about to expire.
You should seek legal advice in relation to your particular circumstances before introducing a prospective buyer to your Landlord or Franchisor.