Top 7 Legal Tips When Selling A Business

If you are proposing to sell your business, proper planning and preparation before entering into any discussions with potential buyer(s) will assist you in obtaining the best possible price for your business, limit delays and reduce exposure to risks.  Sierra Legal shares their top 7 tips…

Tip 1:  Share sale vs asset sale

If you operate your business through a company, consider how the transaction is to be structured – i.e. are the shareholders selling their shares in the company that operates the business or will the operating entity be selling its assets (if you operate your business as a sole trader or through a trust, the transaction will normally need to be structured as a sale of the assets, so your transaction structuring options become more limited).

There can be different tax outcomes for a share sale transaction compared to an asset sale transaction – so speak to your accountant or financial adviser early.

Tip 2:  Get your backyard in order

Consider and collate the documents/information that a potential buyer will want to see when conducting due diligence on your business.  It is important to get everything in order before entering into discussions with a potential buyer to determine whether there are any gaps or errors in the information (or documentation which can be corrected before due diligence commences).

If you are able to give a potential buyer correct and up-to-date due diligence documents, this is likely to help give the potential buyer comfort, enhance value and lessen the severity of warranties and indemnities that may need to be agreed with the ultimate buyer.  Missing documents (or gaps in information) can have the reverse effect.

The categories of key documents/information that a potential buyer is likely to want to review during due diligence is set out in Sierra Legal’s M&A planning checklist.  Sierra Legal has made the checklist available on its website – https://www.sierralegal.com.au/mergers-and-acquisitions-checklist/.  Please feel free to download it.  This is a generic checklist and if you would like it tailored for your particular transaction, please give the team at Sierra Legal a call.

Tip 3:  Allow for a comprehensive due diligence process

It is important to have a well organised and comprehensive data room as part of the due diligence process.  A data room is important for a few reasons:

• The content of the data room forms the basis on which a potential buyer will determine its offer price for your business – so in simple terms, a disorganised/deficient data room can often result in a lower offer price (or the buyer requesting onerous terms and conditions in the sale and purchase agreement to protect its position).
• If important information is missing from the data room (or there is any false or misleading information) and the deal goes ahead, then this may result in the buyer making a claim against the seller in the future for breach of warranty or misleading and deceptive conduct – so it’s important to have an accurate record of exactly what was disclosed to the buyer to assist with any future claims.

Tip 4:  Try and get drafting control of transaction documents

Transaction documents typically include sale and purchase agreements, transitional services agreements, contract assignment or novation agreements, assignments of existing leases, shareholders agreements, and property conveyance agreements etc.

Sellers often fall into the trap of thinking that they will save costs by getting the buyer to prepare the first draft of all transaction documents.  There are 2 main risks with this approach:

• The seller may end up in a far worse position because the buyer is likely to produce buyer friendly transaction documents; and
• Substantial costs can be incurred when negotiating the documents back to a reasonable position.

In our experience, it is better (from a seller’s perspective) for the seller to prepare the first draft of most transaction documents (especially, the sale and purchase agreement), and for the seller to be “commercial” when preparing those transaction documents (as documents that are too one-sided will often lead to lengthy negotiations, or even result in a potential buyer walking from the deal).

Tip 5: Try to avoid earn-outs (and other forms of deferred consideration) as a seller

• An earn-out is a deferral of part of the purchase price pending certain events occurring – usually linked to performance of the business after it has been sold.  From the seller’s perspective, it is best to avoid earn-outs and other forms of deferred consideration, as they create risk and often lead to disputes.
• See our articles https://www.sierralegal.com.au/news/2019/6/15/5-important-things-to-remember-for-earnouts-when-selling-your-business and https://www.sierralegal.com.au/news/2019/7/4/earnout-protection-mechanisms-for-business-sale-agreements where we discuss earn-outs in further detail.

Tip 6: Consider the limitations on potential warranty claims

Other than the amount of the purchase price, the warranties and the limitations on warranty claims are the aspects of sale and purchase agreements that are usually most heavily negotiated.

Sellers should try to impose:

• time limits on warranty claims (i.e. deadlines within which potential warranty claims need to be commenced);
• financial limits on warranty claims (i.e. capping the amount that may need to be paid as part of a warranty claim); and
• other restrictions (including preventing warranty claims for matters that were disclosed to the buyer as part of due diligence – which reinforces the importance of having a comprehensive data room).

Tip 7:  Deal isn’t done until completion occurs

• Keep pressure on after signing and use a “completion agenda”.  People often fall into the trap of thinking that the deal is done once a sale and purchase agreement is signed, but this is often not the case and a lot of work still needs to be done (such as satisfying conditions precedent and getting ready for completion).
• When organising the release of registrations on the Personal Property Securities Register, start the process early. The buyer will likely require all relevant PPSR registrations to be released prior to or at completion and it can be difficult to convince secured creditors and other third parties that hold PPSR registrations over a target business to release those registrations quickly. There may also be historical registrations that haven’t been released (even though they are no longer relevant) and reconciling all of the registrations can be time consuming.

Extra Tip: Appoint your advisers early

• Seek help from professional advisers before approaching or engaging in discussions with any potential buyer(s).  You will typically only get one opportunity to approach and impress a potential buyer, so ensure that you give the best possible impression by seeking advice on the optimal way to market your business and to rectify potential “deal killers” before they are discovered by a potential buyer.
• Ensure your advisers (corporate advisers, lawyers and accountants/tax advisers) have experience in M&A transactions.

About Sierra Legal

Sierra Legal is a boutique corporate and commercial advisory law firm that specialises in assisting its clients with buying and selling businesses, corporate structuring, capital raisings and general corporate/commercial matters.  Sierra Legal has lawyers in Melbourne, Brisbane and the Gold Coast and all lawyers are Director or Senior Associate level with at least 10 years’ experience in large local and international law firms.

For further information on Sierra Legal’s services and experience please see www.sierralegal.com.au, for further news updates please see https://www.sierralegal.com.au/news, or follow us on LinkedIn or Facebook..

Alternatively, please do not hesitate to contact:
Troy Mossley, Senior Associate, Sierra Legal on M: +61 (0) 403 212 939 or E: tmossley@sierralegal.com.au
Craig Sanford, Director, Sierra Legal on M: +61 (0) 416 052 115 or E: csanford@sierralegal.com.au
Mike Jeffery, Director, Sierra Legal on M: +61 (0) 402 745 054 or E: mjeffery@sierralegal.com.au