What are the stages of selling a business?
Deciding to sell your business is a milestone, requiring planning and organisation to ensure a smooth transaction.
By Jesse Sharp and Gessica Giordano
P&B Managing Partner and Head of Commercial Law Jesse Sharp and Senior Associate Gessica Giordano are leading business lawyers with exceptional combined experience including general commercial advice, business sales and purchases, commercial and retail leasing and intellectual property.
Your small business is your livelihood. You built it. You grew it. But now you’re considering selling it. Depending on its size and complexity, preparing a business for sale can involve substantial work. This article examines the stages of selling a business, offering insights for effective negotiation, regulatory navigation and knowing when to seek professional help.
What are the initial stages of selling a business?
When you first decide to sell, you must also determine what to sell: assets or shares. The process and outcomes differ, so we recommend seeking our legal help, as well as your accountant’s advice, to choose the best option for your circumstances. If you decide that a business (asset) sale is the best approach, there are several key stages to complete before signing on the dotted line.
Understanding what your business is worth typically requires an independent valuation from a business broker, valuer or accountant. This can help you:
- negotiate the sale;
- agree on terms with a Purchaser; and
- ensure a less stressful transaction.
A valuer may request:
- detailed financial statements;
- details of tangible assets;
- details of intangible assets such as intellectual property and goodwill;
- legal documents;
- registrations and authorisations;
- employee information;
- customer and supplier details; and
- other business records.
They may also need information about market conditions, sales information, the business’s history and business plan.
A range of factors can influence the valuation. If you’re the Vendor, it’s worth planning how you’ll manage them. For example:
- maintaining your business reputation;
- demonstrating a strong trading history;
- developing a strategic business plan;
- protecting intellectual property;
- securing supplier agreements and other contracts;
- managing property leases;
- establishing trade conditions; and
- retaining key staff.
For more information, see our “Business Selling Guide”.
As the Vendor, another important preliminary issue is how long it will take to reach settlement and how the delay may affect your financial goals. Straightforward sales can take up to three months, rather than a few weeks (even if that’s the advice you’ve received from your broker). As we will explore, many factors influence the timeline.
What is a heads of agreement document?
After valuation comes the process of seeking a potential Purchaser and then negotiating a purchase price and other terms. Often, due diligence is still pending at this point and the necessary legal documents haven’t been finalised.
This is a challenging time for a business sale, because completing all the requirements may take time. There’s a risk that momentum will slow, and a party may lose interest.
To keep the process on track, the parties may enter into a Heads of Agreement document. It’s generally preferable that the Heads of Agreement, isn’t binding on either party (particularly if lawyers aren’t involved at this stage to advise the parties). Instead, it’s intended to record important agreed terms, identify areas that require further negotiations, and assist in the preparation of the contract of sale.
Heads of Agreement may also be referred to as letters of intent, letters of offer or memoranda of understanding. It should document key details such as:
- names and contact details of the parties;
- the proposed purchase price;
- what assets are included in the sale;
- conditions precedent;
- any special conditions of sale;
- confidentiality obligations; and
- intention to enter into a contract.
The Heads of Agreement should specifically state whether it is intended to be legally binding (or which clauses are legally binding, such as confidentiality or exclusivity). Clear language and defined terms are key to avoiding misunderstandings. We also recommend getting input from key advisers such as your accountant, business broker or lawyer before signing.
Why is due diligence important?
Due diligence is a thorough investigation; a process of reviewing all aspects of the business in preparation for sale. The purpose is to avoid risky surprises or legal issues and to help the purchaser assess whether the sale price is fair.
For these reasons, it should be completed before the parties enter into a contract for the sale of the business. (sometimes, it’s completed after the parties enter into a contract, where it’s a condition precedent. See below for a discussion about this.)
Due diligence is the Purchaser’s responsibility and cost, so they may engage professionals to analyse the information, such as an accountant, lawyer or business consultant. As the Vendor, there are things you can do to make the process easier and quicker. For example, gathering and organising documents such as:
- financial records, including profit and loss statements, tax returns and cash-flow statements;
- legal documents such as supplier agreements, leases, licences, permits, and registration of business name;
- operational information relating to business systems, policies, procedures, and employee records;
- employee information such as copies of the employment agreement, details of employee entitlements and an understanding of each employee’s role in the business; and
- intellectual property such as trademarks, copyrighted information and other documented intellectual property.
As the Vendor, consider engaging professional help, depending on the complexity of the sale and the availability of documents. You can simplify your obligations by ensuring:
- agreements are in writing, and
- documents are organised and easily accessible.
It’s good practice to take these measures, regardless of whether you intend to sell, as it allows the business to operate in an orderly manner and facilitates succession planning. For more information, see our article, “Most Common Legal Issues for SMEs”.
What is a Section 52 Statement?
If you’re selling a business in Victoria, you must give the purchaser a “Statement by a Vendor of a Small Business” if the purchase price is $450,000 or less. This must happen before signing a contract of sale or paying a deposit.
It’s a legal disclosure requirement under section 52 of the Victorian Estate Agents Act. For this reason, the Statement is more commonly known as a Section 52 Statement.
The Section 52 requirement doesn’t apply if the business needs a liquor licence to operate.
For more information, see our article, “What is a section 52?”
What should I know about the Sale of Business Agreement?
Once you’ve negotiated the key terms and provided the Section 52 Statement (if required), the next step is to draft and execute the Sale of Business Agreement. It should be comprehensive and clearly outline the rights and responsibilities of each party.
It must have the fundamental terms, including:
- purchase price;
- payment details and method;
- conditions precedent;
- settlement date;
- restraint of trade; and
- confidentiality requirements.
Other specific clauses usually include:
| Clause | Rationale |
|---|---|
| The business’s debts remain with the vendor after settlement | To protect the Purchaser from unexpected claims. |
| The Vendor will assist the Purchaser | A defined scope and period either immediately prior to or post-settlement in which the Vendor will help the Purchaser transition into the business. |
| Personal Property Securities Register (PPSR) | The PPSR confirms a creditor’s interest in a business asset, so the clause should require any asset to be sold free of any PPSR charge or encumbrance unless the parties agree to any permitted encumbrances. |
| Vendor and purchaser warranties | Both parties should provide warranties, for example, regarding asset ownership, the accuracy of information, and the authority to sell. |
| Stock valuation and transfer | Specify how any stock is to be valued and the quantity to be transferred at settlement, and how any issues are to be resolved, for example, by a valuer agreed to by the parties. |
| Apportionment of outgoings and employee entitlements | Specify how rent, outgoings and employee entitlements will be apportioned between the parties at settlement. |
| GST | The clause specifies whether the parties agree that the contract is for the supply of a going concern in which case the purchaser will not pay any GST on the price. |
A properly drafted contract will also include other specific information about the business:
| Item | Examples/considerations |
|---|---|
| List of assets | For example, plant and equipment, and intangible assets such as goodwill. The plant and equipment should be described in detail to avoid confusion or misinterpretation. |
| List of IP | Intangible assets, for example, trademarks such as logos. (Whether they are registered or unregistered is usually listed separately). |
| List of registrations, licences and authorisations | Attach copies of all documents to the contract of sale. |
| List of all material contracts | For example, supplier, customer and service agreements. |
| Employee information | For example, names, roles, entitlements (especially accrued long service leave, annual leave and personal leave) and any employment instruments so the purchaser can arrange for the transfer of staff who are offered and accept employment, while meeting legislative requirements. |
| List of current lease documents | Attach copies of all relevant lease documents so:
1. the purchaser can check information relating to the premises; and |
Sales agents or brokers may use templates for standard form contracts. However, because every business sale is different, you may also need legal advice about taxation, strategy, restraint clauses and other requirements. For these reasons, we recommend using our experienced lawyers to prepare the appropriate Sale of Business Agreement.
The Purchaser may negotiate further after seeing the Sale of Business Agreement or as a result of its due diligence, for example:
- the purchase price;
- the payment terms; or
- other terms and conditions.
Don’t sign the Sale of Business Agreement until you’re satisfied with the terms.
What are conditions precedent?
In a sale of business, conditions precedent are the specific conditions that must be met before settlement. If a party fails to meet the conditions precedent, the other party can withdraw from the sale unless it waives its right to terminate the Sale of Business Agreement.
Some examples include:
| Condition precedent | Explanation |
|---|---|
| Subject to finance | The sale is conditional upon approval of finance by the Purchaser’s lender. |
| Transfer of lease | The sale is conditional upon the landlord’s consent to the assignment of lease. |
| Employees | The sale is conditional upon key employees accepting the purchaser’s offer of employment. |
| Third-party consent | The sale is conditional upon consent from third parties. For example, suppliers who consent to continue key agreements so that any business disruption is minimised. |
| Due diligence | The sale is conditional upon a favourable outcome of due diligence investigations. |
| Trial period | The sale is conditional upon the purchaser being satisfied with the business’s performance within a defined trial period. |
When the conditions precedent are met, the contract becomes unconditional and when all the necessary tasks are completed, the parties proceed to settlement.
What should I know about settlements for the sale of a business?
Settlement (also referred to as “completion”) is when the business transfers from Vendor to Purchaser, with the final exchange of money. Because every business is different, each will have different settlement requirements. However, standard requirements cover all conditions precedent being met, payment of the purchase price and transfer of assets and business records.
Additionally, adjustments will be necessary, where there are recurring expenses (such as rent, outgoings and wages) that have either been paid in advance or are due but have not been paid at the date of settlement. Accrued employee entitlements will also need to be accounted for at settlement. The adjustments balance those payments fairly between the parties.
Some obligations may continue after settlement, such as non-compete and confidentiality clauses. Both parties must comply with those obligations.
What should I do next?
Selling a business can take several months to complete because of requirements such as due diligence and contractual conditions precedent. However, you can make the process more efficient by documenting key agreements and ensuring all business records are up-to-date and accessible. It’s an excellent strategy to have them organised well in advance of deciding to sell.
We have significant experience in guiding business sales. Contact us to learn more about the stages of selling a business and how we can support yours.
Please note: The information covered in this guide is general and should never be substituted for professional legal advice. Contact us for further information.