Buying and Selling a Business (2021 Update)
The purchase and sale of a business can be a legal headache. Read this article for everything you need to know about buying and selling a business.
A transaction regarding the purchase and sale of a business can be a legal and financial headache. When you are selling a business you are transferring ownership of assets, responsibilities and a bundle of rights to the owner. A business sale agreement should contain clearly expressed terms and conditions of a transaction. This is to avoid future disputes and ensure both parties can identify who owns what.
Business Sale Agreements
These agreements can be entered into when a sale or purchase of a business has been negotiated. The agreement will set out the important terms and conditions of the sale or purchase.
Below are a list of the key legal elements that you must consider when creating a Business Sale Agreement.
The Transfer of Business Ownership
The agreement should describe the nature of the arrangement in full when selling a business. The agreement should provide:
- The full name and ABN of the vendor of the business;
- If more than one entity is sold, provide relevant ABN of each entity;
- The full name of the purchaser of the business.
Is everything necessary for the operation of the business being sold under the arrangement? If applicable, note items not sold and the reason for this.
Items which may be necessary
- Plant and equipment;
- Licences or permits;
- Restrictive covenants;
- Intellectual property;
- Employee skills and knowledge;
- Client/customer lists;
- Fixed assets;
- Advertising material;
- Rights under contract (lease contracts, contracts of supply to the enterprise, customer contracts).
The vendor’s conduct pending completion of the sale
It is necessary to consider if the vendor will carry on the business until the day of the sale or if the sale has already been made, did the vendor carry out work until this day? This is important to check as it will impact operations and the amount of money coming into the firm. Furthermore, the new owner may want to make immediate or future changes that both parties should be aware of during the transfer of ownership.
A Restraint Clause
Both parties should agree to a reasonable period of restraint. This prevents the vendor from being involved in a company similar to or in competition with the business. The vendor may not disclose or communicate any confidential information of the business. This is important as trade secrets or other intellectual property should be protected. The vendor’s knowledge of the business would put them at an advantage that competitors could exploit.
Include the payment or if the payment is not included explain how it will be calculated. Payment is one of the most important terms of the agreement. It is also one of the hardest terms to strike a balance between the buyer and seller. The vendor should choose a valuation method and consider obtaining professional advice before making an agreement. Some basic things to consider in the valuation includes:
- Amount of assets the business contains;
- The profits earned each financial year;
- The potential for the business to grow.
Terms and Conditions
Define the important terms and conditions once the sale has been negotiated. These will often vary depending on the circumstances of the transaction. To ensure these terms are conditions are legally binding, the agreement should be signed by both parties and witnessed by someone who is not a party to the transaction. The agreement should also be dated for it to be considered to be a legally binding contract.
The relevant parties warranties are contractual statements of fact and act as a mechanism for protecting the sale as well as drawing out the issues at the time of sale. This can help to provide assurance, usually to the buyer, that they are getting a fair bargain for the price they are paying. This does not preclude the operation of basic protections that pre-exist in the law.
Employees (including in relation to superannuation) debtors and creditors of the business
It is important to disclose information relating to the employees, debtors and creditors at the time of sale. In addition to contract and intellectual property law, employment law principles may apply to these type of agreements. A business sale agreement may involve the transferring of employees between the parties involved. Employers must take care to ensure they are following minimum employment standards set out.
Use the LawPath Business Sale Agreement to easily create a Sale Agreement for your Business. Alternatively, talk to one of our consultants via the link below to get immediate advice.
Daniel is a Legal Technology Intern at Lawpath. He is currently studying a Bachelor of Laws/Commerce double degree at the University of Wollongong. He is interested in corporate, commercial and sports law, with a focus on how legal technology can help produce effective outcomes.