Article Series: Guidance on Business Sales (Part 2)
PART 2: Documentation and Business Sale Process
Following on from the first part of our 4-part series on business sales, in this second part, we will consider the documentation required and the processes involved in buying and selling a business once an appropriate acquisition structure has been determined.
Documentation
Heads of Agreement / Terms Sheet
For more complex transactions (e.g. transactions involving a large number of assets or extensive negotiations of the conditions of sale between the parties), the parties may agree to enter into a ‘heads of agreement’ or a ‘terms sheet’ to document the key terms and conditions agreed to prior to the full form agreement being prepared. This reduces the likelihood of any misunderstandings between the parties and serves as a ‘road map’ for the preparation of the full form agreement.
Business Sale
A business sale will ordinarily be documented by way of a ‘business sale agreement’, ‘contract of sale of business’ or an ‘asset sale agreement’ which will set out the agreed terms on which the business is to be bought and sold.
Broadly, a business sale agreement will commonly contain the following key elements:
a settlement timeframe or date which will usually be dependent on the satisfaction of certain conditions precedent (i.e. conditions which must be satisfied in order for the agreement to become binding and for settlement to occur);
list of assets being sold and the liabilities that the buyer will be assuming;
purchase price and payment terms (e.g. deposit amount and whether the business sale will be subject to finance);
provisions in relation to the adjustments of outgoings of the business (including any employee entitlements if applicable);
any representations, warranties and indemnities to be provided by the seller and/or the buyer;
deliverables to be provided by the buyer and seller at settlement; and
any post-settlement obligations or restrictions if applicable (e.g. assistance period, restraint of trade etc.).
From a buyer’s perspective, it is important to ensure that all of the assets being sold are accurately described and included in the agreement and that the seller has clear obligations to do the things necessary to give effect to the transfer of the various assets being sold.
Share Sale
A share sale will ordinarily be documented by way of a ‘share sale agreement’.
In summary, the main components of a share sale agreement are as follows:
description of the shares being bought and sold (i.e. the number and class of shares);
purchase price and payment terms;
any representations, warranties and indemnities (ordinarily requested by the buyer and provided by the seller given the potential liabilities that the buyer will be exposed to – please refer to the previous part of this series for further details in relation to this concept);
deliverables to be provided and any obligations to be satisfied by each of the buyer and seller at settlement; and
any post-settlement obligations or restrictions if applicable.
Section 52 – Statement by a vendor of a small business
If the business being sold (whether by way of a business sale or a share sale) is a small business with a purchase price of less than $450,000 (excluding stock), the seller is also required to provide a disclosure statement in accordance with section 52 of the Estate Agents Act 1980 (Vic) prior to the parties entering into the agreement or the seller accepting any deposit from the buyer. This disclosure statement contains key financial information (e.g. business operating report) in relation to the business.
Ancillary Documents
In some cases, ancillary or supporting documents are also required, including:
confidentiality agreements (to protect the confidentiality of any information exchanged before, during and after the sale process);
separate intellectual property assignment deeds (to produce to IP Australia to evidence the transfer of intellectual property if parties do not wish to disclose the whole of the business sale agreement);
transitional services agreements (if the buyer requires the assistance of the seller to transition the business over following settlement); and
notices advising certain parties of the sale (for example, employees, customers, suppliers and government agencies).
Process
The process involved in the sale of a business can broadly be summarised into the following stages:
1) Pre-contract
The buyer should gather the relevant information and documentation required to conduct its due diligence in respect of the business. At a high level, the due diligence process is an opportunity for the buyer to consider and examine the current operations, associated risks and ongoing potential of the business in order to ascertain its value.
The findings from such due diligence process will often inform the contractual protections that the buyer will seek to be included within the relevant agreement. We will discuss the due diligence process and the key matters to look out for in further detail in the next part of this series.
Following the due diligence process, the parties will then negotiate the commercial terms and conditions in relation to the sale of the business to be documented in the relevant agreement.
2) Pre-settlement
Once the agreement has been entered into between the parties, the buyer and seller will each work towards satisfying all conditions, completing the necessary processes and obtaining the required documents in anticipation of settlement.
If there are any conditions precedent specified in the agreement, these must be satisfied prior to the date specified in the agreement. For example, business sale agreements are often conditional upon and subject to the landlord providing its consent to the transfer of lease. If the landlord does not consent to the transfer of lease, the condition precedent will be incapable of being satisfied and the business sale agreement will be void (i.e. the contract will not become binding and will come to an end).
There is likely to be a greater amount of administrative work involved during this process to prepare for settlement in relation to a business sale as it will involve transferring ownership and title of individual assets and rights under key contracts from the seller to the buyer.
3) Settlement
At settlement, the parties will each provide any documents or items that are required to transfer ownership and title of the business to the buyer.
For example, the deliverables required at settlement in the case of a business sale may include:
conducting a stocktake to determine the value of stock;
delivering business records and keys to the premises to the buyer;
delivering releases of any security interests that apply over the assets being sold to the buyer;
exchanging any transfer documents required in relation to the assets; and
payment of the purchase price following adjustments of any outgoings by the buyer to the seller.
In the case of a share sale, the deliverables will involve fully executed share transfer forms and company resolutions required to give effect to the transfer of shares to the buyer and the change of officeholders in the target company.
4) Post-settlement
The parties will attend to any post-settlement matters as the circumstances require (e.g. updating Australian Securities and Investments Commission (ASIC) in relation to the share transfer and change in officeholders and other administrative matters in relation to insurance and employees etc.).
The relevant agreement will continue to operate and bind the parties in respect of any post-settlement obligations despite settlement having occurred. For example:
the seller may be required to comply with its obligations in respect of providing the buyer with assistance in relation to the operation of the business if an assistance period has been agreed to under the relevant agreement; or
the seller may be restricted from operating a competing business for a certain duration of time and within certain geographic regions if a restraint of trade clause is present in the relevant agreement.
The extent of the negotiations and the processes involved for each transaction will depend on the complexity of the business and the various components required to operate the business.
In the next part, we will be providing an overview of the due diligence process undertaken by a buyer as part of the pre-contract stage.
If you are looking to buy or sell a business, please feel free to contact us. We would be happy to guide you through this process.
Disclaimer: The content of this publication is provided for general information purposes only. It does not, nor is it intended to, constitute legal advice and must not be relied upon as such. Should you wish to obtain advice pertaining to a matter covered by this publication, we recommend you get in touch with us to discuss your specific circumstances.
This publication was written by Nicole Tram, Lawyer and Winston Lay, Director.