Seven Things to Think About When Selling Your Business
So, you're thinking about selling your business! You might be right at the start of the sale process, you may have some interested potential buyers, or maybe you've found a purchaser.
But, no matter what stage of the sale you're at, you should obtain advice specially tailored to your unique situation.
PW Lawyers can provide you with expert assistance throughout the process. You can call us on (02) 9415 8192 or contact us to book an appointment.
But first, here is a list of seven key things that you should be aware of when selling your business.
1) What will the sale involve?
The sale a business usually encompasses everything that makes up that business. This includes tangible assets (such as plant and equipment), and intangible assets (such as goodwill, trademarks, and copyright).The sale may also involve the transfer of:
- leases on premises or equipment;
- agreements with suppliers or domain registrations; and
- any employees and other workers.
Before the sale, you should clarify who owns the plant and equipment used in the business, and be ready to prove that ownership if required. Any security interests attached to the equipment must be discharged before the sale of the business is completed.
Additionally, it should be considered as to whether the business' purchaser will be able to obtain exclusive use of names, logos, or positioning statements after the sale is completed.
It will also be in the purchaser's interest to properly secure the goodwill of the firm they are acquiring. This may require that certain things be satisfied, including agreements with existing suppliers, or competition restraint deeds. PW Lawyers can help you negotiate and prepare these documents.
2) Apportionment of the Purchase Price and Income Tax Deductions
When agreeing on a purchase price for your business, that price is usually recorded on the contract as an apportionment between equipment and goodwill (with trading stock being a separately identified value).
The value allocated for business equipment will be an important consideration in relation to the tax deduction you will be able to claim for asset depreciation.
Provided the assets are sold at arm's length, where the market value of these assets is less than the written-down value in the books, you may be entitled under law to a further tax deduction (in addition to the yearly claim for depreciation).
You should consider an agreement with the purchaser that will grant you the full scope of income tax advantages available relating to asset depreciation.
3) Things that should be disclosed in the contract for sale
Unless already stated in the contract and, unlike in a sale of property, you are not required by law to disclose information relating to the sale of your business unless you are assigning a retail lease (see below).
Nevertheless, it is customary for business vendors to attach a number of particular items to the contract.
Some of these attachments include:
- a list of plant and equipment,
- financial documentation, and
- any licenses critical for the operation of the business.
A purchaser will often ask for a warranty as to the accuracy of each of these items to be attached to the contract.
It is a requirement of the contract that any registered or unregistered security interests over plant and equipment making up part of the sale have been discharged prior to completion. You will likely need the necessary searches and releases of security interests on your behalf. PW Lawyers can help you with these.
4 ) Requirements for transfer of an existing lease
If a lease over the business premises exists, you can either:
- agree to create a new lease if the existing one is close to expiring, or
- transfer the existing lease to the purchaser.
If a new lease is to be created, PW Lawyers can assist you with the negotiations, and ensure that the contract is conditional on the landlord agreeing to grant a new lease after exchange of contracts.
However, it is more likely that there will be an agreement to transfer the existing lease to the purchaser as the new lessee.
Agreement to transfer may, however, be subject to your landlord's approval of the incoming tenant, and it is possible that the landlord may refuse to grant consent.
This has the potential to upend the transaction and it is best that you obtain legal advice.
Depending on whether the lease is considered to be a commercial lease or a retail lease under legislation, you may also need to comply with a number of legal disclosure requirements to the incoming lessee, which will include the sourcing of certain disclosure documents.
Quite often, your landlord may require all parties to agree to and enter into a tripartite deed of assignment before the lease can be assigned to the incoming purchaser.
As part of PW Lawyers' retainer for acting on your sale, we will provide a comprehensive review of any deed of assignment document prepared by the landlord's solicitors, and engage in negotiations if required.
In PW Lawyers' experience, landlords have sometimes tried to take advantage of outgoing tenants by including terms stipulating that any existing guarantees will continue even after the lease is assigned.
It is our aim to ensure that you are not caught unawares by such terms, and that you have the necessary understanding of the contractual terms to enable you to make informed decisions during the course of negotiations.
Further, in the case of a retail lease, if the relevant disclosure documents are not provided at least 7 days prior to assignment, you may continue to be liable under the terms of the lease even after the lease has been assigned.
If there is a mortgagee involved, consent may need to be obtained for the transfer to be effective.
PW Lawyers can assist you with producing the documents and obtaining the necessary consents required in order to ensure that everything flows smoothly at settlement.
5) How are employee entitlements taken into account in the sale?
If your business employs people, then the transfer of business process means that the staff members' employment will be terminated with you, and the purchaser may in turn make them an offer of new employment (which, in certain cases, is deemed to be continued employment for certain entitlements of the employees).
Employment law is complicated and it is best that you obtain specialist legal advice .
You are required to notify any existing employees not being transferred that their employment will come to an end on the date of settlement, and to pay out all of their entitlements.
On the other hand, if any or all employees are transferring to the purchaser, you will need to take a number of steps to effectively prepare for the transfer.
These steps include the provision of up-to-date employee records to the new owner, and the disclosure of any obligations you have with your current employees, being contractual, leave, financial or legal.
You and the purchaser will then need to agree on which obligations will be transferred to the new owner, which will in turn affect the entitlements that must be paid out on settlement.
Many entitlements, such as long service leave, are governed by statutes, and these statutes may have an effect on what the purchaser is required to recognise regarding the employee's existing service.
6) Going Concern Exemption to GST
Ordinarily, a GST liability arises whenever a business is sold, and therefore a sale would be considered a taxable supply under legislation.
However, exemptions do exist under law that can allow your sale to be a GST-free transaction. The most important exemption for your purposes is that the sale is a 'going concern'. This will apply if a number of criteria are satisfied.
To qualify for this exemption, you will need to ensure that you are supplying all things that are necessary for the continued operation of the business, and that you will carry on the business until the day it is transferred to the purchaser.
There will also need to be certain terms in the contract ensuring that the purchaser is registered for GST and will continue to operate the business.
If you are unsure about whether your sale will meet the criteria of a "going concern", PW Lawyers recommends that you obtain accounting advice.
If the sale transaction is not the sale of a going concern, GST will be payable. In this instance, PW Lawyers can draft a term into your contract allowing you to pass on the GST liability to the purchaser.
It is common to provide that the purchaser is to pay you GST on top of the purchase price, however the purchaser may not want to do so, and it will therefore be subject to negotiation. It is best that you obtain legal advice.
7) Capital Gains Tax (CGT) concessions for small businesses
Capital gains tax concerns for transfer of business can be quite complex, and you will need to obtain tailored expert advice to your specific situation.
Generally, any capital assets will attract capital gains tax if they are sold as part of the business. The individual 50% capital gains tax discount that applies in certain situations is not available for companies, however there are a number of concessions exclusively available for small businesses, provided that your business is classifiable as one.
Should this be the case, there are a number of capital gains tax concessions potentially available, including:
- an exemption if you have owned an active business asset for 15 years (as well as satisfying a number of other criteria),
- a 50% active asset reduction,
- a retirement exemption, and
- roll-over relief may be available on satisfaction of some additional conditions and tests.
PW Lawyers can provide you with an overview of these concessions.
However, it is essential that concrete taxation or financial advice is obtained from an expert in those areas to ensure you meet the requirements.