Business Sale Agreement

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How do our business sale agreements help?

We’ve seen so many deal-breakers for businesses when it comes to business sale agreements. From unclear terms to inadequate protection against liabilities, these issues can lead to costly legal battles and lost business opportunities. Here’s how we help:

• Clear and precise terms
• Comprehensive liability protection to safeguard your interests
• Accurate asset valuation for fair transactions
• Seamless ownership transfer to ensure smooth business continuity

Our commercial lawyers robust and legally sound business sale agreement, protecting your business and facilitating a successful sale. Contact us today to get started on your agreement.

Article – Business Sale Agreement: What is it and Key Terms to Include

The sale or purchase of a business can be a complex process. When drafting business sale agreements, it is important to consider key areas of risk in order to ensure that the process is smooth for all parties in the transaction. This article will consider what a business sale agreement is and the key terms to include in one. 

What is a business sale agreement? 

A business sale agreement is an agreement which is negotiated between the vendor and purchaser of a business. A business sale agreement will set out key terms such as the purchase amount, assets which are included in the sale (including intellectual property) and so on.  

A business sale agreement is usually prepared by the vendor and sent to the purchaser for negotiation.

Why are business sale agreements important?

Business sale agreements set out the terms that both parties are agreeing to.  

Where you are the purchaser, a business sale agreement ensures that the agreement outlines the entire inventory of assets that you are purchasing, including applicable warranties. If you are the seller, it is important to obtain legal advice so you are across the warranties that you are providing, as well as the consequences flowing from a breach of such warranties.

What are the key terms to include in a business sale agreement?

Purchase price and adjustments

One issue to consider at the outset is whether a deposit is required and how much it will be. Generally, a deposit of 10% of the purchase price is paid upon signing the agreement to the vendor or to the vendor’s solicitor to be held on trust until completion of the transaction.  

The purchase price can be broken down into three major categories: 

Good Will 

This refers to assets which are intangible, such as your businesses reputation, brand etc. It is important to note that whilst goodwill is separately identified on a balance sheet, it cannot be purchased or sold separately from the business. In other words, without the business there is no goodwill.  

The goodwill of the business can be affected by a myriad of factors such as: customer relations, customer loyalty, branding, reputation, loyalty etc.  

Stock 

If stock is being sold in the business, this can be included in the final price.

Plant and equipment 

This refers to the equipment, tools, machinery and other physical assets necessary to run the business.  

Apportioning between Goodwill, Stock, Plant and equipment

We recommend speaking to an accountant to ensure that the apportionment of these three categories accurately reflect your accounting records and takes into account your position from a tax perspective.  

Assets being sold

When selling the business, a full list of assets are needed. Key assets can include intellectual property, plant and equipment and other equipment which is involved in the business.  

Intellectual property is broad and can include the the business name, website for the business, social media accounts, trade marks, logo’s, trade secrets and material developed by the business over time. If you are purchasing a business, understanding what intellectual property is being sold is critical to the success of the business post settlement.  

Please see our IP checklist for more information.

Contracts

If you are selling the business, it is possible that you may have existing contracts on foot which require the consent of the other party in order to assign or novate that agreement to the purchaser. An example is a lease where the landlord has to approve the incoming lessee and approve of the lease assignment.

If you are a director of a company, you may have (in the natural course of running the business) signed directors guarantees. You will need to review these and ensure that prior to settlement you receive a release from any guarantee you have provided or otherwise seek consent to transfer the guarantee to the new owner of the business.  

If you do have contracts that need to be assigned or transferred it is crucial that you start this process early to ensure that this does not delay the parties from settling. 

Warranties and indemnities

A warranty is a statement of fact that is included in a business sale agreement with the intention of inducing the purchaser to enter the agreement. Examples of warranties include that no assets have any encumbrances over them such as a PPSR. Indemnities in business sale agreements are often used to protect the purchaser from a breach of a warranty by the seller (i.e. the vendor made a warranty which was subsequently discovered to be false).  

As a seller it is imperative that you do not provide a warranty that you know is to be untrue. The purchaser relying on the warranty you provide will be entitled to recover loss and damages if it is found that the warranty provided was indeed not true.   

Restraints

Restraint clauses are often used in business sale agreements to prevent a seller from setting up a competing business, given that the seller would have knowledge of the industry, clients and the tools necessary to compete with the business being sold.  However, courts generally are not willing to enforce restraint clauses unless they protect a legitimate business interest. It is standard practice to use a cascading clause in restraint provisions to ensure that there is some level of protection for the purchaser, even if small.   

Employees

If you are buying or selling a business that has employees, the agreement must set out the details of each employee including their remuneration, any accrued entitlements such as personal leave, annual leave and long service leave.  

It is common practice for employee entitlements to be adjusted for in the final settlement sum payable by the purchaser. This is to account for any employee entitlements that are accrued under during the period that the seller owns the business  but are paid to the employees when the purchaser owns the business.  

Special conditions

Often, buyers and sellers will include special conditions in the business sale agreement. These conditions operate in addition to the clauses which exist in a standard form of business. 

An example of a special condition is ensuring that the settlement is conditional upon finance being approved or third party consent to a transfer of a contract.  

Special conditions are common and will appear in most sale of business agreements, however a commercial lawyer will be able to identify which clauses are necessary for your circumstances and which are not.  

Key takeaways

The sale and purchase of a business can be a complex process, and it is best to engage lawyers to draft, review and negotiate the business sale agreement. Some key points to consider in business sale agreements are: 

1. generally, the vendor is responsible for the preparation of a business sale agreement;  
2. the purchaser should exercise due diligence in investigating the business, its assets and its operations prior to purchase; and 
3. care should be taken when reviewing key terms and whether they reflect the intentions of both parties.  

Contact us for a quote or estimate to prepare or review a business sale agreement today.  

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