Guide to selling a business in NSW

How do I sell my business? Is your business read for sale?

Probably all business owners have some sort of plan as to how they want to retire from “the business”. For many business owners, the plan will involve selling the business or a share in it…and if all goes as expected there’ll be plenty of time to make sure the business is ‘market ready’… in the same manner you would if you were selling your home.

However, by now you’ll know that things don’t always go to plan. The moment when you want to sell your business is just as likely to choose you, as you are to choose it… a sudden urge to travel or have a tree change, a bad health outcome for you or a member of your family, or an interested but unexpected purchaser knocking on your door, are just some examples.

Process for selling a business in NSW

Unfortunately, we’ve seen many clients with financially strong businesses end up disappointed or distressed that this hasn’t translated to a sale price anywhere near what they expected. This is usually the result of selling the business before the ‘house is in order’.

Getting your business ‘market ready’ requires you (with help from your advisors, where necessary) to thoroughly undertake your own ‘due diligence’. Remember, a purchaser doesn’t know your business like you do and will be looking at it with a sceptical, critical and conservative eye, trying to assess its true value.

When undertaking due diligence, a prospective purchaser will treat any real or apparent ‘gaps’ that are discovered in the compliance, financial documentation or operational aspects of your business as risks. Consequently, the prospective purchaser will expect a reduction in price or some other protection (such as warranties and indemnities) or they might walk away altogether!

So to make sure your business is ‘market ready’, either for a planned sale, or just in case the moment to sell chooses you, we recommend you plug all gaps now.

What to consider when selling a business in NSW

When determining the sale price of your business, or later negotiating with purchasers, you usually consider issues such as the cost of paying out business loans and overdraft facilities. However, in our experience there are a number of other things well worth considering to ensure a Vendor gets what was expected out of a sale.

Corporate structure

The buyer wants to see that the entity that is selling the business and the assets is the legal owner of the business and assets. If there are any discrepancies in this regard you should be up-front about this and make sure that the contract or contracts for sale reflect the correct legal structure.

Outstanding debts and security interests

A quick search of the Personal Property and Securities Register will reveal any registered security interests against you individually or your company. If any of these security interests relate to assets of the business then the buyer will not want to buy them until the debt has been satisfied by you.

Finance generally

The buyer will want to examine the records of the business so that they are aware of the financial position of the business before they purchase it. You should make sure that your records are up to date and clear. If there is any false or misleading information in your records then the buyer could claim that there was misleading and deceptive conduct.

The buyer will typically need to see the accounting records, financial statements and the directors’ statements and reports. You should also inform the buyer about the debts of the business, whether secured or undisclosed.

Business licensing

If you use a business name to operate the business then you are required to register that business name and this is something that the buyer will make enquiries about before they buy your business. The business name is typically sold with the business and will be transferred to the buyer on completion so it must be registered, and if it is not then you need to be up-front with the buyer about this.

Similarly, depending on the nature of your business there may be other licences that you should have in place which will be transferred to the buyer on completion (i.e. local council related licenses, liquor licences and industry specific licences).

Key contracts

The buyer will want to make sure that any contracts relevant to the continued operation of the business are in order, including:

• supply contracts;
• franchise agreements;
• employment contracts with staff; and
• leases and similar agreements.

The buyer may request that copies of certain contracts be included as annexures to the sale contract and they will want to review the terms, so it is prudent for you to make sure that there are contracts in place and that they are assignable to the buyer. We can assist with reviewing your business contracts prior to the sale.

Employment matters

It is typical to include details of all of the staff who work in the business in the sale contract so that the buyer is aware of who the employees are so that they can decide whether they want to keep them on or not once they purchase the business.

As the seller, you should make sure that you have employment contracts in place and make sure that you know all of the key details about the staff that the buyer will want to know (i.e. commencement date, position, length of service). You should also make sure that there are clear records setting out the details of your employee’s entitlements so that the buyer is fully aware of any ongoing obligations.

Intellectual property rights

Your brand, logo or other intellectual property may be one of the key factors in a buyer deciding whether or not to purchase your business. The buyer will want to know the nature of all intellectual property that you own so that they can check that the appropriate registrations are in place. You should make sure that your registrations are valid and that the buyer is made aware of any challenges to your intellectual property ownership.

Vendor’s due diligence checklist

1. Regulatory approvals, licences and permits – do you have all the ones you need and are they up to date? – if not you won’t have a deal.
2. Notices issued by authorities – unanswered notices are like waving a red flag to a bull.
3. Tax and other filings – make sure they’re up to date.
4. Business contracts with significant customers and suppliers – make sure they are in writing – purchasers are wary of businesses that rely on unwritten contracts.
5. Registering intellectual property rights that are key to your business (such as a trademark, business name, design or patent) – purchasers will require this protection.
6. Collating and organising all business documentation – this will project to a purchaser a culture of compliance and organisation.
7. Claims and Commercial Litigation – be aware of the status of any actual or potential claims or litigation – purchasers will naturally have reservations and expect an explanation; and
8. Financial Statements – make sure they’ve been properly prepared and supporting documents are available for verification by a purchaser – gaps and anomalies spell danger.

Closing

Once a prudent vendor has considered these issues, they can then decide whether to negotiate a higher sale price, negotiate terms of the sale contract which require the purchaser to take responsibility for some of the above expenses, or both.

Providing the above issues (and those related to them) are known to the vendor they can be catered for properly in negotiations and contract drafting. Such important issues can and will become problems for vendors when ‘the deal’ has already been completed without affording them due consideration.

For any assistance with preparing your business for sale, contact our Business Law Team today.