Selling Your Business: Do You Need a Lawyer?

I am often surprised at the amount of business-owners that reduce the profitability of their business in the eleventh hour by 'going it alone' when they sell their business.

Business owners spend countless hours and expend significant effort, expense and entrepreneurial stress in running and building up their business so that it may become a saleable asset. However they seem very reluctant to make the additional investment by getting specialist business lawyer to help them negotiate and handle the sale of the very thing that they have invested so much into. Although I do not doubt the negotiation skills or the knowledge of a business owner within their industry, there are several legal minefields that an experienced lawyer can assist the seller to navigate and optimise the outcome for all parties.

What Are You Selling?

The first point to consider in selling a business is exactly what it is you are selling. Not only will this help you determine a price but it ensures that there is a clear understanding between the parties about what the buyer will be receiving in exchange for their money. Your business broker, accountant and solicitor should work together on this issue to ensure that the sale contract is prepared with all of these issues and that there is no miscommunication.

The aspects that should be considered include the goodwill, fixtures, fittings, furniture, chattels, plant and equipment, industrial and intellectual property, work in progress (if any), permits and licenses and any other assets required to operate the business. You may also wish to exclude some items which the buyer would ordinarily expect to receive as part of the sale.

Goodwill: A Key Component of Business Value

The goodwill is the measure of how the market views your business but is obviously something that you cannot touch. However it is usual that a portion of the purchase price which you are asking is attributable to goodwill. The goodwill can be harmed, for example, if you set up a competing business. Accordingly, you should expect the buyer to impose conditions preventing you from affecting that goodwill after completion of the sale. This may be in the form of a restraint on when, where, how and if you can establish another similar business which may compete with the one you are selling. This can be a problem in particular with sole traders but can also extend to key employees within larger businesses. Any restraint of trade in the business sale contract must be reasonable otherwise the Courts will not enforce them and they will be invalid. Determining what is reasonable is best determined in consultation with a lawyer who drafts appropriate restraints of trade according to the law in this area.

Furniture, Chattels, Plant and Equipment

These are the physical "things" that you are selling. Anything physical that you are selling should be contained in the schedules attached to the contract. Similarly, anything physical that you wish to retain should also be clearly set out in a schedule. The contract should specify whether things are to be sold free and clear of all encumbrances. The items may need to be valued so the contract should set out a method of doing so if this is necessary.

Industrial and Intellectual Property

Intellectual property may include trade names, trade marks, domain names, patents, designs and copyright. If this type of property is being included in the sale it will need to be documented and transferred as part of the sale. Similarly, any licences relating to the operation of the business will need to be transferred if you are authorised to transfer them. If they are not transferable, or only transferable with consent, steps will need to be taken to ensure that the buyer gets the benefit of these licences.

Permits and Licences

Depending on the nature of the business being sold some of the licences will not be transferable at all. If this is the case the buyer will need to apply for their own licence. This is something that will need to be worked out before the contract is prepared, as it will affect the conditions in the contract and ultimately the settlement of the sale.

Disclosed Problems with the Business

In Queensland, the vendor has certain obligations to disclose the existence of certain problems with a business before selling. These disclosures must be made before the buyer signs the contract. The Business Sale Contract (REIQ) has schedules specifically designed for this purpose. If a vendor fails to make proper disclosures, this may give rise to a right of termination by the buyer. Vendors beware: it is often worth disclosing something before the sale rather than risking termination of the sale, or allowing a misrepresentation to arise (with its potential legal consequences). Your solicitor and business broker can advise you on this issue.

Premises and Lease Arrangements

If the business is operated from premises (whether owned or leased by the seller), the manner in which these premises are dealt with in the sale contract will need consideration. This can include the transfer, assignment or sub-lease of the seller's existing lease, or the seller's assistance in the buyer negotiating a new lease. Where the premises are owned by the seller, the seller may sell the premises as part of the business sale, or may enter into a lease arrangement with the buyer.

Employees

The Fair Work Act 2009 (Cth) recognises that when a business is sold and there is an assumption of service, the employee retains continuity of service. This means, among other things, that the new employer takes on the liability for the leave entitlements of the transferred employees unless the parties take steps to otherwise deal with those entitlements. The contract needs to clearly deal with the employee entitlements and it is vital that the vendor and purchaser understand that these entitlements will transfer to the new owner unless the contract provides otherwise.

Seller Assistance in Learning the Business

Many buyers, particularly first-time business buyers, require the vendor's assistance in learning the business after the sale has been completed. The form of this assistance, whether in the form of a training period or whether the vendor will be employed as a consultant, needs to be addressed in the contract. Not dealing with this issue in the contract can be a recipe for disaster, as both parties can come out of the sale with different expectations. Having your legal rights set out in the contract, (to be agreed before the sale), is the best way to address this issue.

Payment Arrangements and How to Take Security

Vendor financing arrangements are becoming increasingly common, especially in the current economic climate. Many buyers don't have the full purchase price available and many vendors are prepared to take a portion of the purchase price over time. However, these arrangements can be problematic if not thought out properly. For example, if the buyer doesn't pay, the vendor needs to be able to enforce their right to repayment. The vendor's solicitor should consider the purchase of appropriate security in favour of the vendor so as to give the vendor some recourse if the buyer defaults in the payment of the purchase price.

Final Thoughts

Selling a business is a complex exercise, particularly from a legal point of view. Engaging a specialist business lawyer early in the process is an investment that is likely to save you time, money and stress, not to mention that it gives you the best opportunity to optimise the sale price of your business and limit the risk of the sale not completing. Call Joe Kafrouni on 07 3236 2604 if you would like advice on the sale of your business.

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers

Disclaimer

The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.

Liability limited by a scheme approved under professional standards legislation.