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.

The goodwill

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, if there is anything important to you that you wish to keep, these must be dealt with specifically in the business sale contract so that the buyer is aware that they will not be receiving these items as part of the sale. Your solicitor will be able to write appropriate special conditions into the business sale contract to deal with this.

Things that are leased or partly owned should also be listed exhaustively to avoid confusion and possible misrepresentation. If there are items that are leased or rented, the agreements relating to these items (such as a phone system or motor vehicles etc) must be transferred to the buyer on or before settlement. Quite often this transfer will involve you signing a transfer agreement stating that you agree to continue to be bound by the contract even though the buyer is now in your place. This allows the business who has leased the items to you to chase you if the buyer does not meet their end of the bargain. You should ensure that you properly understand the terms of the transfer by referring it to your solicitor.

Industrial and intellectual property

This type of property is quite far ranging. Common examples of this type of property include website domain names, websites, procedure manuals, logos, trademarks, business names, patents etc. Items of this nature that are of great importance to the operation of the business should be specifically mentioned in the contract. Again some of these items may need to be transferred. You may not know how to do this but your solicitor will be able to show you the way.

Permits and Licenses

Most businesses require some sort of permit or license to operate. As the seller of a business, one of your obligations is often to sell the business with the permits and license required to operate it. If you are unsure if your business holds those that are needed, you should contact your solicitor who will be able to tell you which ones you need and to assist you with transferring them.

Problems with the Business

A business sale contract usually includes a provision that there are no demands against the business that may be a problem. In particular, that there are no outstanding demands, requisitions or notices about the business or the premises. For example, a notice from the local council that the premises are too dirty to operate a food business and must be cleaned. Such things will usually come from the government or other bodies that regulate the type of business which you operate. They can even be issued following an inspection of the business and the premises requested by the buyer. If there are any outstanding requisitions then it is up to you to fix the defects at your cost (unless the contract provides otherwise). Your solicitor can prepare a clause to deal with this so that your exposure is limited.

Premises

Where the business is situated is an important issue in selling the business. If the business owns the premises then arrangements should be made to either sell or lease the premises to the buyer if they require it to run the business. If the business is being conducted from leased premises then the lease will need to be transferred from you to the buyer.

The landlord will need to consent to the transfer of the lease from you to the buyer. Normally, they will need to be satisfied that the buyer is of good character, has enough business experience to keep the business trading at least to the same standard and that they are financially sound. This will involve the buyer providing the landlord with information about their finances and previous business experience and the landlord eventually transferring the lease to the buyer’s name.

It is up to you to obtain the landlord’s consent including handling the flow of information between the landlord and the buyer and paying for the landlord’s costs in considering whether to give its consent. This can be complicated and may require a lot of work. It may also involve technical legal argument between the parties. This makes the process of assigning the lease to the buyer a potentially stressful situation at best and a deal-breaker at worst. For these reasons I would strongly recommend engaging a lawyer where a business sale involves leased premises to ensure your interests are protected. If you do not engage a solicitor, you increase the likelihood of delay and losing the buyer.

Employees

If you employ any employees in your business, the details of these must be provided to the buyer. You are supposed to terminate the employment of each employee effective the day of settlement and the buyer will re-employ the employees they require. You will then be required to pay the buyer at settlement any wages, holiday pay, long service leave and other accrued employee entitlements that is owing to the retained employees. This is because the buyer will need to make good on the accrued entitlements after settlement. You will also be required to pay these entitlements directly to any employees that the buyer does not want to retain and that you have terminated.

Often sellers are unaware of this obligation and fail to budget accordingly leaving them with less money than they expected at settlement.

Your Assistance in learning the Business

There are two ways you can ‘pass the torch’ to the buyer to ensure a smooth transition. The buyer may request one or both of these methods. The first is commonly known as Seller’s Tuition and involves the buyer coming to the place of business for a period before settlement to watch and learn from you how to run the business and to be introduced to your customers and suppliers.

The second option is called Seller’s Assistance. This involves you making a commitment to attend at the business within business hours for a period of time after settlement.

It is desirable that once you sell the business, you are able to walk away unless you specifically wish to remain there. As such, you should not become obliged to remain at the business after settlement for an extended period unless you have been properly compensated. This may be done by increasing the purchase price or you may even be employed or engaged as a contractor to assist the buyer for a mutually beneficial period after the sale. If this is the case then the terms of employment or engagement, including remuneration, should be carefully negotiated before settlement.

Payment arrangements and their pitfalls – how to take security

Quite often buyers will ask sellers to defer payment of all or some of the sale price or to agree to pay the sale price in instalments. This is called “vendor finance”. Whilst the decision to do this is entirely yours, you may not be aware of the steps you can take to secure your “loan” to the buyer. This may be in the form of a “mortgage” taken over the business and business assets and/or over the buyer’s property for example their home. Your solicitor will be able to advise you of the options available to you and quantify the risk you are taking.

Finally…

Even though I have identified some specific examples of when you may face difficulties in selling your business, there are many other times when you will encounter unplanned or unknown variables. Often it is these that will cause you the greatest headaches but  are possibly solved by your solicitor.

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.

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