A GUIDE TO BUYING & SELLING A BUSINESS
If you have plans to either buy or sell a business, it almost goes without saying that you need to do a good deal of preparation in order to undertake and complete such an important transaction.
Preparation entails doing everything from getting your financial, legal and compliance records in order, to doing wider research on the market and conducting a process of due diligence on the other party involved in the transaction.
This article provides a general guide to the process of either buying or selling a business. For more detailed advice and guidance on preparing for either event, you should seek the counsel of legal professionals experienced in this area of commercial transactions.
Selling a business: essential things to do
What are you selling: Once you have made the decision to prepare your business for sale, the first question to answer is what exactly are you offering for sale: Is it the entire business including all its assets? Are there any assets you should sell first before offering the business for sale? Does it include the registered business name and any of the business’ intellectual property (logos, software, etc.)? Does the business own any property such as the operating premises which is also to be included in the sale? It is best to properly answer these questions before you advertise for a buyer.
Paperwork: Because a prospective buyer will generally conduct a thorough process of due diligence or discovery of your business and its status before committing to buying it, it is prudent to have all essential paperwork accurate, intact and up-to-date. This may include a few sessions with both your legal representative and your financial adviser to ensure all documents relating to, for example, leases, hire-purchase agreements, contracts with clients and suppliers, agreements with distributors, licenses, patent and trademark registrations, employment contracts, and compliance documents relating to government regulations (such as health and safety or environmental protocols), are all in order.
Is a broker needed?: If some of these preparations already sound too time-consuming, you may need to avail yourselves of the services of a professional business broker. These specialists exist to provide advice about the market trends in your industry and suggest ways to show the business in the best light in terms of profitability and growth. A business broker can take a lot of stress out of the process for you, but make sure you review their references and testimonials beforehand to ensure you engage a reputable one.
Franchise agreements: If you are the owner of a franchise business which you now wish to sell, it is essential you check the terms of the contract – particularly the clauses on transferring the business – and keep the brand’s head office informed of your plans. In Australia, franchise agreements are governed by a Code of Conduct under the Competition and Consumer Act. Seek legal advice to ensure you are not in contravention of the Code when selling your business.
Tidy up: Meaning, make sure both the premises itself looks presentable for a potential buyer, but also that you have tidied up any forecasts about the business which make it look more attractive to a buyer – such as the value of intellectual property, revenue growth projections or positive forecasts about market conditions.
Employees: If you have staff, it is important to do the right thing by them in preparing the business for sale. Keep them informed with a clear and consistent means of communication about the steps you are taking and the possible impact on their positions with the business.
Valuation: This is perhaps the most important part of your preparation for sale and can be tricky as you also need to value intangibles such as goodwill and reputation. Experienced accounting and/or financial professionals can help you decide on a sale price for the business that encompasses the premises, any plant, equipment or other assets, as well as goodwill, reputation, intellectual property and the like.
Advertise: There are numerous ways to make it known your business is for sale. If you use a business broker, they will have a number of means by which the business can be advertised, including using a commercial real estate agent. In addition, the business network in which you operate will likely be useful, supported by digital and traditional media, as well as word-of-mouth.
Buying a business: what you need to know
Compared with selling a business, preparing to buy a business involves a lot more questions. While some of these questions are the same as those asked by the seller, such as what is actually for sale in the transaction, many are unique to making a sound assessment of such a big investment decision. A potential buyer is essentially on a journey of discovery to find out as much as possible about the existing business they plan to buy.
Due diligence: A good commercial lawyer will help you identify the main areas you need to check off in order to make the decision to buy a particular business. This process requires collating information from the seller, existing clients and distributors, government and industry associations, and current employees in order to gain a clear picture on why the business is being sold, what is being offered for sale, whether there is a viable business plan in place, and how the business is regarded within the particular industry.
To do this, your legal representative will examine:
- the business’ accounting, bank and taxation records;
- its liabilities, past, current and future;
- its compliance with applicable laws and regulations;
- the terms of existing contracts entered into by the business;
- staff arrangements, including entitlements, super, bonuses and commissions;
- property, such as the premises from which the business operates;
- intellectual property;
- any relevant restraint of trade and/or confidentiality issues.
Franchises: If you plan to buy an existing franchise business, it is important to be fully aware of the terms of the franchise agreement and the fact there is legislation governing this sort of enterprise.
Franchise agreements can be heavy on the detail so it is best to rely on expert guidance as to how easy it is for the business to be transferred to you; whether there are special conditions attached to the franchise, such as a contract specifying a minimum term, and whether the seller has observed all terms of the agreement to date.
Finance and business structure: Before making the decision to purchase a business, you will need to secure sufficient finance for the purchase price as well as stamp duty and, in some cases, GST. Understanding the right business structure for your circumstances is also crucial. Taxation, regulatory compliance, risks and limitations differ depending on whether you own the business as a sole trader, a partnership, company or trust.
In conclusion: negotiating the terms
Whether buying or selling a business, the final stages through contract negotiation to final handover can be stressful and the assistance of your trusted legal adviser will prove crucial.
Ivy Law Group offers commercial and business law experts with widespread experience in buying and selling a business, advising on business structures, contracts, franchising agreements, leasing and employment law issues to clients that range in size from sole traders to large corporations.
Call us today on 1800 431 602 for an initial, no obligation consultation to discuss anything raised in the article, whether you plan to either buy or sell a business.