The process of buying or selling a business can be challenging if you do not have any appropriate exposure in business before. You therefore need to carefully analyse the procedure of buying or selling a business.

There are few steps involved before you buy or sell a business. These steps will give you a fair idea regarding what needs to be done before you actually start the process.

Organise your business

In the sale of a business, all equities, liabilities, profit & loss statements, tax returns, ownership, and other information of the business will be reviewed. So, the seller needs to have the information ready.

The buyer of a business must be able to genuinely prove that the buyer can afford to purchase the business by ensuring financing, lines of credit and/or shore up cash positions.

Non-Disclosure Agreement

After the buyer sees an opportunity in the seller’s business and the seller agrees to entertain the buyer as a prospective purchaser, both parties’ trade secrets must be kept confidential. For the same purpose, a Non Disclosure Agreement (NDA) is required, irrespective of the fact whether the parties to the agreement know each other or not.

Negotiate the business terms

Once the prospective buyer and the prospective seller have signed the NDA, the next process is to discuss the basic points involved, such as:

  • (a) the cost of the business or the method of valuation of the business;
  • (b) what assets or portions of the business are being purchased or sold, including what intellectual property will be included in the deal;
  • (c) whether there is any pending litigation or other debts that need to be avoided in the transactions;
  • (d) the goals of each party in seeking out a deal;
  • (e) timing of the deal – does it meet your needs and timeline;
  • (f) the money – finance terms, lump sum payments, escrow and so on;
  • (g) the involvement of the buyer and seller after execution of the purchase or sell agreement; and
  • (h) non – compete clause.

Create a Letter of Intent

The purpose of the Letter of Intent is to embody all agreed terms in writing from the time of negotiation, so that the party cannot say that there was a misunderstanding during the verbal discussion of the business terms for the purchase or sell agreement at any later stage.

The buyer should:

  • (a) examine the employment contracts, lease agreements, human resource policies and processes;
  • (b) check whether there are any impediments over the company;
  • (c) validate the financial health of the company;
  • (d) ensure that all the policies are in compliance with the legislation in place; and
  • (e) review if there are any commercial agreements in place.

The seller also needs to satisfy himself about the financial status of the buyer so that he can expect prompt payments, if at all the deal requires further payments by the buyer.

Drafting the purchase or sale agreement

Whether you are buying or selling a business, drafting of the respective agreement is the most essential step. You should be very sure that all necessary terms and conditions are incorporated. This should include all of the business terms set forth in the signed Letter of Intent and also the following clauses:

  • (a) consideration and payments;
  • (b) procedure of completion;
  • (c) intellectual property protection;
  • (d) warranties;
  • (e) severability;
  • (f) non-solicitation clause;
  • (g) assignment;
  • (h) attorney’s fees;
  • (i) governing law;
  • (j) conflict of law; and
  • (k) arbitration.

If you are intending to enter in to the process of sale or purchase of any business, feel free to contact our team of experts at Owen Hodge Lawyers.

Buying an established business or selling an existing one is a complex undertaking involving numerous considerations. Being unaware of the various financial and legal issues and procedures involved in such transactions might land you up in deep trouble. Therefore seeking professional advice is recommended. Furthermore, details relating to any transaction for sale or purchase of a business should be documented identifying the subject of transaction, consideration involved and expected obligations of the parties.

The decision to sell or purchase a business involves some essential guidelines to be followed by the seller or the buyer and these have been placed as follows:

(a) Forms of Buying or Selling a Business: A person may have many reasons to sell or purchase a business. However while making such a decision, it is important for the person to determine the manner or the form in which the business should be sold or bought. A business may be sold or bought in any of the following forms:

  • (i) Asset purchase: In this form the buyer purchases a part or the entire of the seller’s assets.
  • (ii) Stock purchase: In this form the buyer purchases either all or a substantial portion of the seller’s stock and assumes all the debts and liabilities of the seller.
  • (iii) Merger: In this form the businesses of both the buyer and the seller combines to form a single new business.

(b) Negotiation Stage: This process involves preliminary discussions with respect to:

  • (i) The minimum price which the seller expects from selling the business and the maximum price the purchaser is capable to pay for purchasing the business;
  • (ii) The manner of valuation of the business to be done either by way of financial statement valuation or by comparing the business with other similar sale and purchase;
  • (iii) Preparing and handing over the ‘Information Memorandum’ by the seller to the buyer comprising detailed summary of the business proposed to be sold. This includes information including history of the company and its operations, key management personnel, financial reports and divestment reasons;
  • (iv) Obtaining any or all relevant government approvals, licences and any renewal thereof required for the purpose of selling or purchasing the business;
  • (v) Identifying key value preservation issues like employee retention, transition planning and considering tax and accounting implications; and
  • (vi) Any matter which the seller and the buyer shall deem proper.

(c) Pre-closing Stage: The buyer should initiate and conduct the due diligence process at this stage and ask from the seller, the required documents so as to understand all aspects of the seller’s business including its assets and liabilities. Upon satisfaction, the buyer should provide a letter of offer to the seller.

(d) Contract Stage: Once the seller accepts the offer made by the buyer, both the parties should enter into a contract. Like any other contract, the contract to sell or purchase a business must include the essential elements of offer and acceptance, sale consideration, capacity of the parties to contract and their intention to make the contract valid and legally binding. In addition to these, the contract should also include:

  • (i) The representations and warranties to be provided by the parties;
  • (ii) Tax liabilities of the parties while selling or purchasing the business;
  • (iii) Indemnities to be provided by the seller;
  • (iv) Obligations of the parties to maintain confidentiality;
  • (v) Applicable State or Territory law governing the terms of the contract; and
  • (vi) Dispute resolution through negotiation and mediation including reference to arbitration in case of any dispute or breach of the contract.

(e) Closure Stage: At this stage the buyer pays the entire sale consideration to the seller and accordingly, the contract is signed and executed by both the parties. Certain other documents relating to lease and assignment should also be signed. The seller may disburse the sale proceeds by paying to any existing creditor.

(f) Post–purchase Requirements of the Buyer: Once the deal is closed, the buyer may be required to disclose certain information as the new owner of the business to the regulatory authorities like the Australian Securities Investment Commission (ASIC) and Australian Security Exchange (ASX).

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