Simple Tips when Buying or Selling a Business

While the whole process is undeniably exciting, it can also be complex. Understanding the sale process can help reduce the stress of the transaction.

 

Step 1: Initial discussions between the seller and purchaser

Firstly, the parties must come to an agreement on the key terms of the transaction. These include such things as sale price, training periods, completion date, contingent conditions, and what is included in the sale. Often these discussions will be guided by the business sale agent.

It is important that the purchaser conducts due diligence checks on the business to assess the value of the business and discover unknown risks.

 

Step 2: Drafting the contract.

Once the parties have come to an agreement on the key terms, usually the vendor will engage a solicitor to draft a sale contract.

 

Step 3: Negotiations

The purchaser should also engage a solicitor to review the contract. The solicitor will advise on risks and recommend amendments to ensure the contract protects the purchaser’s interests and provides necessary warranties and protections. The purchaser’s and vendor’s solicitors will then negotiate and ‘fine tune’ the terms of the contract in accordance with their client’s instructions.

 

Step 4: Exchange

Once the terms of the contract have been finalised, each party will sign the contract. Often each party will sign an identical version of the contract, called a counterpart/ After the contract is signed, the parties will exchange the counterparts so that each party has an original signed copy of the contract. On exchange, the purchaser must pay the deposit to the vendor.

 

Step 5: Pre-settlement obligations

The contract will specify certain pre-settlement obligations that both parties must fulfill. This can involve a range of things such as:

Vendor:

• allowing the purchaser with access to the business records to perform due diligence
• continue business in the ordinary and usual course
• maintain goodwill
• maintain stock levels
• maintain equipment in the same state of repair
• take steps to transfer any business names, trademarks, and domains
• ensure that security interests registered against assets are released prior to settlement

Purchaser:

• take actions to transfer any licenses or leases from the vendor to the purchaser.

 

Step 6: Lease considerations

If the business operates from premises (and the premises are not included in the sale), either the existing lease will need to be transferred to the purchaser, or a new lease will need to be entered into with the landlord. Usually, the contract will specify that the sale is conditional on the transfer of the lease or the grant of a new lease on particular terms.

 

Step 7: Settlement

Settlement (or completion) occurs when the transaction is finalised. The vendor’s solicitor will usually produce settlement adjustment calculations. This document will list all payments made by the seller, such as council or water rates, employee entitlements, and other prepayments.

On settlement day, the vendor will give the purchaser all the documents relating to the transfer of ownership of business assets. They will also need to provide any records of the business including contact and client lists as well as any keys and security codes.

When the purchaser pays the seller and receives the keys and documents in return, the purchase is complete, and the purchaser becomes the new owner of the business.