Due to the taxes and duties affecting business transactions that have been abolished or phased out as part of the South Australian state budget of 2015-16 (as we discussed previously here) now is a great time to consider buying or selling a business. In any case, buying or selling can take a great deal of preparation, and if you are in the process of preparing your business for sale then sorting out the key issues early may help maximise the value to you and reduce the risk of a failed transaction.
Below we have highlighted a few of the key issues that you may wish to consider when preparing a business for sale:
Be Clear about What are you Selling
Are you selling the Business; or the Shares in the Company that operate the Business? If the Business is being sold, what assets are being sold? It may be helpful to list them. For example: Plant and Equipment, Intellectual Property, Stock, Debtors, Creditors, Premises?
Get your Financial Information in Order and Up to Date
A potential purchaser will want to look at the finances of the Business as part of their due diligence process. Ensure that the finances are complete current and clear and make sure the figures relate only to the income and expenses of the Business and not a mix of business and personal.
Decide What Information Should be Treated as Confidential
Examples of a Business’s confidential information may include: financial statements, lists of customers, contract information, profit margins or mark-ups. It is prudent, prior to releasing any confidential information about your Business, to provide interested persons with a confidentiality agreement and ask that they sign it prior to you agreeing to release information.
Make a list of the Plant & Equipment that is Leased
Identify which items of plant and equipment are leased and which are not. For each asset that is leased make sure you know when the lease expires, what the effective interest rate is, whether there is an option to buy at the end and if so what is the residual “balloon” payment. This information will be helpful to a prospective purchaser in making a decision about whether they will take over the existing leasing arrangements or not.
Sort out your Stock on Hand
Have the stock levels been accurately recorded in the books? What method will you adopt for valuing stock? Has obsolete stock been properly accounted for? Who will pay for the costs of a stock take should the parties agree to have one? Have a “sale” and sell all obsolete or slow moving stock items. This can minimise the likelihood of disputes about the value of the stock during the sale and reduce the costs of a final stock take.
Deal with Debtors
A potential purchaser may be discouraged from purchasing a Business that has a large amount of debtors. Conduct a review of your debtors. For all debtors outside of payment terms organise them into 3 main categories: write offs, possible write offs and long standing recoverable debts. Be ruthless and deal with the write offs and then engage the services of a debt collection agency to collect as many of the possible write offs and long standing recoverable debts as possible. For the remaining debtors you will need to make it clear whether they will be purchased with the business. If the debtors are to be purchased then what adjustment should be made to the purchase price and will the purchaser be responsible for collecting the debts. If the debtors are not being purchased, then it is usually your obligation (as seller) to collect the debts.
Clear the Creditors
Ensure that the Business is not behind in payments to its creditors. This will help to create a positive impression of the financial strength of the Business.
Put a Value on the Goodwill or Intellectual Property of the Business
How long has the business been trading for? If the business name is registered, the sale should include the transfer of the business name as an asset of the Business. Does the Business own any other form of intellectual property such as trademarks or distinctive logos that will be included in the sale?
Will the new owner take over the old Premises?
If the Business operates from leased premises you need to ensure that the tenure of the Lease is secure and extends sufficiently into the future. Review your Lease to ensure that you are on top of the consents and notices required to be given to the lessor in the event of an assignment of the Lease to the prospective purchaser.
Will the sale be conditional on an assignment of the Lease?
If you own the premises, it may be worth considering either a sale of the Business and lease back of the premises; or a sale that includes both the Business and the premises from which it operates.
Are the employees included in the sale?
A prospective purchaser will ask you about the financial liabilities with respect to your current employees. Are there any employees that are about to go on long service leave? It is important to have your employee records up to date with the following information:
- Leave (annual and personal)
- Safe Work
- Performance Reviews
- Personal Contact Details
- Start Date of Employment
What ongoing Contracts Should be Considered?
Is your Business dependent on suppliers? Examine existing customer contracts to ensure that they won’t expire or require re-negotiation if the Business is sold. A prospective purchaser would most likely ask to see copies of any customer contracts. If there are no written contracts, then information such as the length of time the customer has been with the Business and the overall description of the customer, what it provides to the Business and the likelihood of the customer continuing with the Business will assist a prospective purchaser in understanding the key relationships to your Business. If possible, convert any verbal arrangement into written arrangements to build confidence in a prospective purchaser.
Should there be a Restraint of Trade?
Will there be any restraints agreed to by you or the directors of the Business? The terms and conditions of the restraint will need to be agreed in the sale contract.
Are there any Approvals or Consents Required?
How is your Business financed? You will need to advise the Business’ bankers of your decision to sell. You will also need to deal with existing loans, overdrafts, taxation matters and trade creditors. A prospective purchaser will expect clear title to the Business. Does the Business have any licences such as a liquor and/or gaming licence? Will there be other special conditions attaching to the sale of your Business? If conditions are not satisfied, will the sale be able to continue or will a prospective purchaser be able to withdraw from the sale? It’s important to remember that not all businesses are the same. There will be different issues to consider depending on your circumstances. Although if you use this information as a starting point, it may assist you to achieve a smoother sale process. If you require any further assistance in the purchase or sale of a business then do not hesitate to contact us at Tri-meridian.
Changes to the Real Property Act and the introduction of E-conveyancing will also have an effect on the transactions of buildings and property that may be involved in the sale of a business, for more information on these changes follow the link here.
For further information, please contact the author.
This article is posted in Adelaide, South Australia by Tri-meridian Corporate & Commercial Law and is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. We do not accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your professional adviser.