Selling a Business: Key Legal Considerations

Selling a business can be one of the most significant commercial transactions a business owner undertakes.

Whether you’ve spent years building the business or are preparing to move on to your next venture, a successful sale involves much more than agreeing on a purchase price. Contracts, employees, commercial leases, intellectual property, warranties, restraints, licences and settlement arrangements can all affect the transaction.

Preparing these matters early can make the sale process more efficient, reduce the risk of delays and help avoid unexpected issues during negotiations or due diligence.

For business owners in Western Australia considering a sale, understanding the legal aspects of the transaction before entering into an agreement can help protect your interests and provide greater certainty throughout the process.

Here are some of the key legal considerations when selling a business.

1. Be Clear About What You Are Selling

One of the first steps is identifying exactly what will be included in the sale.

A business may own or control a range of assets, including:

• plant and equipment;
• stock and inventory;
• business and trading names;
• customer databases;
• websites and domain names;
• telephone numbers;
• intellectual property;
• licences and permits;
• contracts;
• goodwill; and
• other operational assets.

The sale agreement should clearly identify what is included and what is excluded.

This can be particularly important where some assets are personally owned by the business owner, financed, leased or owned by another entity.

Creating an accurate asset register early in the process can help establish what is available for sale and reduce uncertainty when the transaction documents are prepared.

2. Get Your Business Records in Order

A prospective purchaser will generally want to investigate the business before completing the transaction.

This process is commonly known as due diligence.

Being properly prepared for due diligence can make a significant difference to how smoothly the sale progresses.

Depending on the business, a purchaser may request access to:

• financial statements;
• tax records;
• major customer contracts;
• supplier agreements;
• employment arrangements;
• commercial leases;
• licences and permits;
• insurance policies;
• asset registers;
• intellectual property records;
• equipment finance arrangements; and
• details of existing or threatened disputes.

Missing, inconsistent or outdated documentation can create concerns for a purchaser and potentially delay negotiations.

Before taking the business to market, it can be worthwhile reviewing important legal documents and identifying any issues that may need to be addressed.

3. Review Your Commercial Lease

For businesses operating from leased premises, the commercial lease can be critical to the sale.

A purchaser may only be interested in acquiring the business if they can continue operating from the existing location.

The lease should therefore be reviewed early to determine:

• how much time remains on the lease;
• whether options to renew are available;
• whether the lease can be assigned;
• whether landlord consent is required;
• what conditions apply to an assignment;
• whether there are outstanding breaches;
• what guarantees or security arrangements exist; and
• whether you remain liable after an assignment.

Landlord approval may take time, and the landlord may require financial information or guarantees from the proposed purchaser.

Waiting until shortly before settlement to address the lease can create unnecessary delays.

Where the location is an important part of the business’s goodwill, uncertainty surrounding the lease may also affect the attractiveness of the business to potential buyers.

4. Review Important Business Contracts

Contracts can represent both value and risk when selling a business.

Long-term customer or supplier agreements may make the business more attractive to a purchaser because they provide some continuity after settlement.

However, you need to determine whether those contracts can actually be transferred.

Some agreements may require the consent of the other party before assignment.

Others may contain change-of-control provisions or termination rights that become relevant when the business is sold.

Important contracts might include:

• customer agreements;
• supplier contracts;
• distribution arrangements;
• equipment leases;
• software agreements;
• licences;
• service contracts; and
• other ongoing commercial arrangements.

Reviewing these agreements before negotiations progress can help identify which consents or approvals may be required.

5. Make Sure You Own the Intellectual Property

Intellectual property can represent a substantial part of the value of a modern business.

Before selling, you should identify the intellectual property used by the business and confirm that ownership is properly documented.

This might include:

• business names;
• trade marks;
• logos;
• websites;
• domain names;
• written content;
• photographs;
• software;
• databases;
• proprietary processes; and
• marketing materials.

Problems can arise where intellectual property was created by external contractors or agencies without clear agreements dealing with ownership.

If the purchaser expects particular intellectual property to form part of the transaction, uncertainty about ownership can become an issue during due diligence.

Identifying and addressing these matters before the sale can help avoid complications later.

6. Consider Employees and Their Entitlements

Employees are an important consideration in many business sales.

Depending on how the transaction is structured, arrangements may need to be made regarding which employees will continue with the purchaser and how employee entitlements will be dealt with.

Relevant matters may include:

• accrued annual leave;
• long service leave;
• employment contracts;
• remuneration arrangements;
• continuity of service;
• outstanding employee obligations; and
• whether particular employees will be offered employment by the purchaser.

Key employees may also have significant value to the purchaser because they hold important operational knowledge or customer relationships.

Employment arrangements should therefore be considered early rather than immediately before settlement.

7. Understand the Purchase Price Structure

Agreeing on the headline sale price is only part of determining what the seller will actually receive.

The business sale agreement should explain how and when the purchase price will be paid.

Depending on the transaction, this may involve:

• a deposit;
• payment of the balance at settlement;
• stock adjustments;
• apportionment of prepaid expenses;
• deferred consideration;
• instalment payments;
• earn-out arrangements; or
• other adjustments.

Where payment will continue after settlement, sellers should carefully consider the additional risks involved.

For example, if part of the purchase price depends on the future performance of the business, the agreement should clearly explain how performance will be calculated and what information the seller will be entitled to receive.

The more complicated the payment structure, the more important it becomes to clearly document how it will operate.

8. Consider Stock and Inventory

For businesses carrying significant inventory, stock can represent a substantial component of the transaction.

The parties should agree on how stock will be valued and when the valuation will occur.

The agreement may also address:

• obsolete stock;
• damaged stock;
• slow-moving inventory;
• maximum stock values; and
• how disagreements about valuation will be resolved.

Without an agreed process, disputes about stock can arise immediately before settlement when both parties are trying to complete the transaction.

Clear provisions can help avoid unnecessary uncertainty.

9. Understand the Warranties You Are Giving

Business sale agreements commonly require the seller to provide warranties about the business.

A warranty is effectively a contractual statement regarding a particular matter.

Depending on the transaction, warranties might relate to:

• ownership of assets;
• accuracy of information provided;
• business contracts;
• intellectual property;
• litigation or disputes;
• employees;
• compliance matters; and
• other aspects of the business.

Sellers should carefully review proposed warranties before agreeing to them.

You should be confident that the statements you are making are accurate and understand the consequences if a warranty later proves incorrect.

Where necessary, particular matters may need to be disclosed to the purchaser rather than leaving an inaccurate or overly broad warranty unqualified.

10. Consider Your Liability After Settlement

Business owners sometimes assume that once settlement occurs, their involvement and liability automatically end.

That may not always be the case.

The sale agreement may contain obligations that continue after settlement, including warranties, indemnities, confidentiality requirements and assistance with the handover.

Existing arrangements may also need to be formally released.

For example, if you personally guaranteed obligations under a commercial lease or supplier agreement, the sale of the business may not automatically release you from that guarantee.

You should identify personal guarantees and other continuing liabilities and determine what steps are required to obtain appropriate releases.

11. Understand Restraint of Trade Provisions

A purchaser acquiring an established business is often paying for its goodwill and customer relationships.

As a result, the purchaser may request restrictions preventing the seller from immediately establishing a competing business or soliciting existing customers.

These provisions are commonly referred to as restraint of trade clauses.

A restraint may seek to limit certain activities:

• for a particular period;
• within a particular geographical area; and
• in relation to specified competitive activities.

From a seller’s perspective, it is important to understand how the proposed restraint could affect your future plans.

If you intend to remain in the same industry, start another business or continue working in the region, an overly broad restraint could create significant practical problems.

Restraint clauses require careful consideration and drafting, and their enforceability can depend on the particular circumstances.

12. Consider Confidentiality During the Sale Process

Selling a business often requires providing prospective purchasers with sensitive information.

This may include financial records, customer information, supplier arrangements, pricing structures and other commercially valuable information.

Not every prospective purchaser will ultimately proceed with the transaction.

For this reason, sellers should consider how confidential information will be protected before providing detailed business information.

A confidentiality or non-disclosure agreement may be appropriate before sensitive information is released.

This can be particularly important where the prospective purchaser operates in the same industry or could potentially become a competitor.

13. Be Careful With Heads of Agreement

A heads of agreement, term sheet or similar document may be used to record the key commercial terms before a formal business sale agreement is prepared.

It might address matters such as:

• purchase price;
• deposit;
• assets included in the sale;
• due diligence;
• proposed settlement date;
• exclusivity;
• confidentiality; and
• important conditions.

These documents can help establish the framework for negotiations.

However, sellers should not assume that a preliminary agreement is automatically non-binding.

Whether particular provisions are legally binding can depend on the wording and circumstances.

Obtaining advice before signing a heads of agreement can help ensure the document accurately reflects what you intend to agree to at that stage.

14. Identify Conditions That Must Be Satisfied Before Settlement

A business sale may depend on several matters being completed before the transaction can settle.

These could include:

• purchaser finance;
• satisfactory due diligence;
• landlord consent;
• assignment of the commercial lease;
• transfer of important contracts;
• regulatory approvals;
• transfer or issue of licences; or
• other transaction-specific requirements.

The sale agreement should clearly explain these conditions, who is responsible for satisfying them and the applicable deadlines.

It should also address what happens if a condition cannot be satisfied.

Clear conditions can reduce uncertainty and provide both parties with a structured pathway toward settlement.

15. Plan the Handover Carefully

A smooth handover can be important to preserving the value of the business after settlement.

Depending on the business, the purchaser may require assistance with:

• introductions to customers;
• supplier relationships;
• operational processes;
• employee transitions;
• software and systems;
• account access;
• transferring telephone numbers;
• website and domain access;
• social media accounts; and
• general business knowledge.

The seller may agree to provide assistance for a particular period after settlement.

If a handover period is part of the transaction, the expectations should be clearly documented.

This includes how long assistance will be provided, what the seller is expected to do and whether additional assistance will be paid.

16. Consider Tax and Financial Advice Early

The way a business sale is structured can have significant financial and taxation consequences.

These issues should generally be considered before the transaction documents are finalised rather than after the commercial terms have already been locked in.

Your accountant or taxation adviser can assist with the financial and tax implications of the proposed sale, while your commercial lawyer can advise on the legal structure and transaction documents.

Having your professional advisers involved early can help ensure the legal and financial aspects of the transaction work together.

Preparing Your Business for Sale

You do not necessarily need to wait until you have found a purchaser before preparing for a business sale.

Early preparation can help identify problems that might otherwise emerge during due diligence.

Before taking the business to market, consider reviewing:

• ownership of key assets;
• commercial leases;
• major contracts;
• intellectual property;
• employee arrangements;
• licences and approvals;
• existing disputes;
• personal guarantees; and
• business records.

Addressing issues in advance can make the business easier for prospective purchasers to assess and may reduce delays once negotiations begin.

It can also give you more time to resolve problems rather than attempting to deal with them under the pressure of an approaching settlement date.

Why Legal Advice When Selling a Business Matters

A business sale agreement determines much more than the amount you receive for the business.

It establishes what you are selling, what obligations you retain, what warranties you provide, how payment will occur and what happens if something goes wrong.

Obtaining legal advice early can help you understand the transaction and negotiate terms that appropriately protect your interests.

A commercial lawyer can assist with matters including:

• preparing or reviewing the business sale agreement;
• negotiating the terms of sale;
• reviewing commercial leases;
• dealing with lease assignments;
• reviewing contracts;
• identifying intellectual property issues;
• advising on warranties and indemnities;
• considering restraint provisions;
• coordinating conditions and approvals; and
• managing the settlement process.

The objective is to complete the transaction with a clear understanding of your obligations both before and after settlement.

Selling a Business in Busselton or the South West?

Businesses throughout the South West operate across a diverse range of industries, including tourism, hospitality, retail, professional services, construction, trades, agriculture and other sectors.

If you’re considering selling a business in Busselton or elsewhere in the South West, obtaining advice early can help you prepare the business for sale and identify legal issues before negotiations progress.

At Leeuwin Legal Collective, we provide clear, practical commercial legal advice to business owners throughout the region.

We assist clients in Busselton, Dunsborough, Vasse, Yallingup, Margaret River and surrounding South West communities with business sales, commercial contracts, commercial leases and other business matters.

Our approach is focused on understanding your objectives, explaining your options clearly and helping you move through the transaction with confidence.

Speak With a Commercial Lawyer in Busselton

If you’re preparing to sell your business, getting the legal foundations right from the beginning can help reduce delays, manage risk and make the transaction more straightforward.

Leeuwin Legal Collective can assist with preparing and negotiating the business sale agreement, reviewing contracts and leases, addressing conditions of sale and guiding you through settlement.

Book a free 15-minute consultation with our team today.

(08) 6716 9348

Clear advice. Practical solutions. Confidence for your business.