Spend the time to get it right – The pitfalls of short cutting a sale or purchase of a business

You’ve agreed on some basic terms of sale, such as purchase price, what you’re buying and the settlement date – but what about all the other elements of a business that have to be dealt with?

THE ISSUE WITH CUTTING CORNERS

Some of the issues that we have seen arise are:

1. Sellers not actually being entitled to own a business name;
2. Purchasers having to bear the cost and liability of employee claims that may have occurred prior to them taking over the business they have purchased;
3. Purchasers taking over leases riddled with problems or not actually being entitled to take over a lease as a result of not obtaining the landlord’s consent; and
4. Purchasers taking over equipment that is broken, unusable or otherwise not actually owned by the seller and able to be sold to a purchaser.

These are only a few of the problems we are seeing arise as a result of clients not wanting to spend the time to properly address these matters at the time of purchasing a business.

SOME KEY CONSIDERATIONS

Some of the key considerations when looking at buying and selling a business are the following:

• The lease – have you considered that you will need the landlord’s consent? Are there existing issues with the lease? There are set processes in place under an existing lease to obtain the landlord’s consent and if not followed correctly, a landlord may refuse to provide such consent.
• Material contracts –For every material contract that may be in place for a business, these contracts will have clauses included that set out processes of obtaining consent to the agreement being transferred across to a new business owner.  If this process is not followed correctly, it could lead to a purchaser of a business not having the right to the benefit of such material contract.
• Employees – are you aware of what employee entitlements you will be liable for when you sell your business? How do you want them to be adjusted? Have you considered the distinction between contractors and employees?
• Intellectual property – do you have your business name registered? or otherwise intellectual property related to the business registered?
• Licenses –  do you need a licence from a local authority to be able to operate the business? How long does a transfer of the licence take to obtain?
• Accounting Advice – Have you consulted your accountant and obtained appropriate structure advice if you are a purchaser and for a seller obtaining tax liability advice?
• Due Diligence – Make sure you are doing your own due diligence and don’t rely on the bright and sparkly ads. This includes but is not limited to –reviewing profit and loss, have any of the employees

The cost of a sale and purchase of business, can be cost heavy – why? Because there are a myriad of matters and issues to cover off in a sale agreement. Not dealing with key matters, such as those outlined above, can expose purchasers and seller alike in the future and can be a costly legal expense if not dealt with appropriately.

KEY TAKEAWAYS

For Sellers – We understand that as a seller of your business, you want to sell the business as soon as possible, rid yourself of the liability it may impose and ride off into the sunset with the purchase price, but it is important to note that if you want to be able to do that, make sure you have all the elements of the sale of business properly addressed.

For Purchasers – We understand that you want to hit the ground running on the settlement date of your purchase, but it is important that you do so being fully aware of what are the key elements that make the business successful and are ready to go for you on that settlement date.

Getting it right on both sides is a smart and worthwhile expense.

If you’re considering buying or selling a business or have questions about the process, reach out to our experienced commercial team.