UPDATED: December 10, 2018
There are many legal considerations to think about when you create a contract to sell business and it is important that you take time with each step to ensure it is done correctly. LegalVision has provided some tips on the important things to consider during this process.
Your main priority is to ensure that your contract to sell business (otherwise known as the Contract for the Sale of Business) represents exactly what was agreed upon between you and your buyer.
Start with these considerations…
What does the sale or transfer include?
When a business is sold, you and the buyer must agree on what items or assets the sale of business will transfer. This is a very common trigger of disputes between buyers and sellers. For example, a seller might think they are retaining a vehicle but the purchaser might think it is included in the business.
According to LegalVision, there are various elements of a business that can be sold or transferred to a prospective buyer. What’s included in the sale depends on the type of business and the buyer’s individual requirements.
Some of the things that may be transferred include:
● The business name;
● Client lists and client information;
● Any assets the business owns;
● Any plant or equipment used by the business;
● Any contracts to which the business is a party, including leases, distribution agreements and client agreements;
● Business contact details;
● Any shares in the company that operates the business (although this would be unusual because, when selling a business, the business is typically sold as a going concern and shares are not usually transferred unless it is a share sale); and
● Anything else that may assist in the operation of the business.
Determining the sale price
The sale price of the business is arguably the most important item to be negotiated. There are a number of ways to value a business, but ultimately the price must be agreed upon by all parties concerned.
When the parties reach an agreement on the sale price, it should attribute to goodwill, plant or equipment. For instance, the majority of the value of a manufacturing business may be in its plant and equipment, whereas a business that provides a service might attribute more value to its goodwill.
This process is important to understand, as there are different tax consequences depending on how the purchase price is allotted. At this stage of the process, it is always a sensible idea to obtain the advice of your accountant.
Should a restraint clause be included?
A “restraint of trade” clause gives the buyer peace of mind. It ensures that, for a certain period of time and over a certain area, the seller will not operate a similar business to the business being sold.
Restraint clauses are usually geographical (e.g. 5 km from the store location) and/or based on time (e.g. until 3 months after the sale). It is common to include a restraint clause when the business is very niche.
The more commoditised the industry, the less likely a restraint clause will be included.
“ If the restraint is too broad and burdensome, it may be unenforceable in the Courts, which is why it is important to speak with a lawyer ﬁrst ” says Lachlan McKnight, CEO of LegalVision.
Are there training periods?
Sometimes the buyer will ask the seller to induct new employees and the buyer into the business by showing them the day-to-day operations. This is a popular inclusion for new owners of small businesses, and usually is anywhere between 1-4 weeks.
What about your employees?
It will be at the discretion of the Buyer whether to offer existing employees roles in the business. Most contracts for the sale of business have speciﬁc clauses regulating the re-hire or transfer of any employees to the buyer. Regardless of the buyers’ decision, you will need to ensure that all statutory obligations like leave entitlements are paid up in full before the sale is complete.
What about taxation?
Before agreeing on the structure of the sale, think about the different tax consequences and importantly consult your accountant to discuss these issues.
Some of the tax concerns may include:
● Goods and Services Tax (GST) – GST may or may not apply to the sale of the business depending on how the deal is structured. If GST applies, the total price may increase by 10%.
● Capital Gains Tax (CGT) – Sometimes concessions on CGT will apply, like the 25% concession that applies to any assets held for more than 12 months. The tax rate that will apply to the sale can be anywhere between 0% and 46.5%. In general, the more you sell for, the higher the tax bracket.
Note: LegalVision is an award-winning commercial law firm in Sydney that brings together lawyers and technologists to deliver efficient and cost effective legal solutions for SMEs, startups and corporates. Contact: 1300 544 755 | LegalVision.com.au
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