When selling a business, you want to maximise your return while minimising any risks associated with the transaction.
In Queensland, many sales of small to medium sized businesses use a standard form contract prepared by the Real Estate Institute of Queensland (REIQ). In this article, we outline five key considerations for a seller when negotiating a business sale contract.
Is the value of stock included in the price?
Many business sales will include a sale of the stock held by the business to the buyer. There are two main ways this can be dealt with in a contract:
- The parties agree that the value of stock is included in the overall price. This is known as “walk in walk out”.
- The buyer is required to pay for stock in addition to the base purchase price. In this case, a stocktake will occur, usually one day before settlement. The stocktake is conducted by the parties, but under the REIQ standard contract, there are dispute resolution provisions if the parties can’t agree. The parties can nominate both an “estimated” stock figure and a “maximum” value. If there is a maximum, the buyer is only required to buy stock up to that figure.
What plant & equipment is included in the sale?
It is important that the business sale agreement lists the equipment included in the sale. The seller should ensure that all equipment is correctly described to avoid any disputes. Serial numbers should be provided where applicable. If any motor vehicles are included, the Vehicle Identification Number (VIN) should be noted.
Equipment should be divided into different categories:
- Unencumbered equipment is owned outright by the seller. That is, it is not subject to any finance.
- Leased equipment is subject to finance. The seller must arrange to pay out the equipment loan before settlement. The seller should contact the lender as soon as possible to determine their requirements.
- Rented equipment is owned by a third party and it will be necessary for the seller to arrange for the rental agreement to be assigned to the buyer.
Are there any conditions precedent that will need to be satisfied?
Various conditions may need to be satisfied before the sale can proceed. Some of the most common conditions are:
- Finance – the buyer may require funding to complete the purchase.
- Leases – if the business is operating from leased premises, the seller must notify the landlord of the sale. Either the lease will need to be assigned to the buyer, or the buyer will need to enter into a new lease. The seller should ensure that there will be sufficient time between signing the contract and settlement to make the necessary arrangements with the landlord.
- Licences – if there are particular licences needed to operate the business, they will need to be transferred or the buyer will have to obtain a new licence. These include food business licences and alcohol licences. We recommend that the parties’ obligations with respect to any licences are clarified by way of a special condition.
- Due Diligence – a buyer may insist that they have the opportunity to conduct some due diligence of the business, inspecting its records etc. This is not part of the standard REIQ contract terms, and would need to be included as a special condition.
Will the buyer offer a personal guarantee?
If the buyer is a company, the seller should consider asking for the buyer’s directors to provide a personal guarantee. This means that if the buyer company is unable to settle the purchase then the seller can sue the directors personally for damages or to compel them to settle using their personal funds.
Otherwise, the seller’s only remedy is against the buyer entity, which may be a company without significant assets in its name.
Will the seller be subject to any restraints?
Many business sale agreements will include a restraint of trade, preventing the seller from competing with the buyer within a particular area (usually expressed as within a certain distance from the business premises) for a certain number of years after settlement.
Under the standard REIQ terms, if the seller is a company, the buyer can also ask all directors and shareholders of the seller to provide similar restraints.
The seller should carefully consider whether such restraints may affect their future plans after exiting the business.
What next?
These are only some of the many considerations when selling a business. If you are looking to sell or purchase a business, the experienced commercial team at Rouse Lawyers would be pleased to assist. You may contact us on 07 3648 9900.
Disclaimer
The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.
Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.