This article sets out the steps involved when selling your business and some of the important factors to consider.
At the beginning of the process, you wish to know what you want to sell, and why. Once you’ve made the decision to go forward, you should be (if not already) talking to your accountant, and perhaps also giving your lawyer a “heads up”.
Ways to sell a business
There are basically two ways to sell a business, so early on you’ll need to be thinking about whether you want to sell:
- some or all the assets of the business, or, alternatively,
- all the shares in the company that owns the assets.
The two methods of sale will largely depend on tax considerations, for both seller and purchaser. What kind of sale suits the seller may not suit the purchaser, so some trade-off may need to be agreed, which will probably have to be put into the sale contract in one form or other, for example –
- sale price, which is less than the valuation, or
- sale price paid over time, by instalments
At this stage your lawyer is involved only in a preliminary way – this is definitely NOT the stage to be drawing up the contract, as it will be subject to more numerous revisions than might otherwise be the case.
The seller and the purchaser may find it helpful to compile a “Heads of Agreement” (“HoA”), before they turn to a formal contract. The HoA can be either binding or non-binding.
Form of the contract
In most cases a “bespoke” sale contract will need to be drawn up. This is especially so for larger transactions.
There is in existence a standard form, NSW Law Society approved Sale of Business (“SOB”) contract which is similar in appearance to the standard form Sale of Land Contract. But whereas the land contract generally comprises relatively few special (or additional) terms and conditions a standard form SOB contract often comprises many special conditions, in the form of amendments to the standard terms. This makes the standard SOB contract unwieldy and unhelpful, both during drafting and afterwards, if a dispute occurs.
How much time does the drafting and signing process take?
This usually takes several weeks as the parties will need to ensure that all that has been negotiated is identified and clearly set out in the contract.
How much does it cost in legal fees?
Lawyer’s fees are usually based on time for this kind of work, not a fixed amount. Nor are fees a function of the sale price – settling and signing a contract can take as much time on a $25,000 sale as a $250,000 sale. This is because facts and understandings often come to light as the contract takes shape. As a very rough estimate, 5 – 10% on 6 figure amounts and up, 20% on lesser sums.
What happens after the sale is settled?
Once the contract has been signed and settled (i.e. the money paid), is that the end of it? Not necessarily. This is due to any one or more of the following reasons:
- the seller may have given warranties or indemnities which run-off over time;
- there may be a retention amount, which is only released upon the happening (or non-happening) of certain events;
- the sale price may be receipted by instalments, upon the achievement of performance milestones post-settlement;
- the seller’s ‘Key Person’ may stay on as a consultant or company director to guide the new owners for a set period.
What are the advantages for the seller of one method of selling a business over the other?
In general terms an asset sale is more attractive to a purchaser, whilst a share sale is preferable for a seller. From the seller’s perspective, the advantages of an asset sale are that a purchaser may more readily do a deal, because:
- a purchaser can properly identify (“cherry pick”) the assets that it wants with no accompanying liabilities;
- the purchaser may be able to write down asset values against future CGT liabilities;
- the purchaser can better protect against hidden liabilities; and
- the parties can apportion sale price against specific assets, which may accrue tax advantages.
An asset sale presents the purchaser with the opportunity to terminate employees that it doesn’t want (although this may present redundancy/payout/accrued entitlement issues for the seller).
If the company to be sold has a complicated share ownership structure an asset sale may be more readily achieved than by getting all shareholders to agree to selling the shares (“pre-emptive rights”).
From the seller’s perspective, the advantages of a share sale are:
- the contract is simpler and ‘cleaner’ from the lawyer’s perspective;
- both parties will be clearer about what is being transferred, so that the buyer can be sure it can run the business – individual assets don’t necessarily have to be specifically identified;
- all of the company’s liabilities (whether known or unknown) are transferred along with its assets;
- it is more clearly a sale of a going-concern, so no GST is payable;
- theoretically the benefit of any contracts, leases or licences should pass with the corporate entity, although in practice the other parties may still need to give their consent to a change of control;
- all employees remain with the company under their existing employment agreements (subject to any change of control terms with executives);
- tax implications can be more favourable – e.g. the seller should be entitled to a 50% CGT discount on the tax otherwise payable on the sale proceeds; and
- NSW government stamp duty is generally much less on a sale of shares, although but for land, stamp duty on asset transfers has now been virtually eliminated.
What kind of things go into the contract of sale?
Such things as:
- Sale price and how/when paid
- Completion date and passing of risk
- Payments in advance and arrears
- WIP and Receivables
- Position of employees
- Indemnities for historical claims against the seller
- Warranties, from both seller and buyer
- Announcements and confidentiality
- Seller finance / security provisions
- Inventory of assets
Who draws up the contract of sale?
Generally, it is the lawyer for the seller, although it can be lawyers for both sides working constructively.
If the purchaser has done a lot of investigative work early on, and/or its lawyer has been closely involved in that phase, it may be more economical for the seller to work off successive draft contracts produced by the purchaser’s solicitor.
If you or someone you know wants more information or needs help or advice, please contact us on 02 8035 5200 or email [email protected].