Selling a business is more complex than most sellers and buyers imagine. As a seller, you may have set up systems and processes to make the business easier to run — such as automated payment systems, customer management software, and other software used in day-to-day operations. When selling the business, these systems need to be transferred to the buyer, which makes the whole sale process take far longer than expected. Today we discuss some of the common issues that arise when selling a business.

Elements of a Business

A business has many fundamental elements that help it run more smoothly. When the business is sold, these elements are also transferred to the buyer:

1. Intellectual Property (IP) — when selling a business, you must consider intellectual property and how it will be transferred to the buyer. IP can include trademarks, domain names, and customer data. If the seller uses customer management software, the licence must also be transferred when the business is sold;

2. Contracts — the seller must transfer all contracts used in running the business when selling it, including contracts with customers. In most cases, customer consent is not required to transfer these contracts;

3. Equipment purchased on finance or leased — these contracts are restrictive and require approval from the equipment supplier. If the equipment is to be transferred, the seller must communicate with the supplier, because the supplier may require extensive documentation so that the buyer can continue paying for the equipment after the business is transferred.

Below we discuss some of the mistakes commonly made when transferring a business.

Issue 1: Rushing the Sale

When selling a business, many sellers are under pressure and end up transferring in a hurry. The elements above are required for the transfer — for example, lease agreements and software subscription contracts. When drafting the sale agreement, these factors can be made conditions precedent to completing the sale; if they are not satisfied within a set period, the buyer is entitled to terminate the contract. This can cause the seller to lose the sale. In addition, if the seller fails to transfer these elements by the agreed date, it may constitute a breach of contract. So before agreeing on a timeline with the buyer, it is essential to discuss with a qualified lawyer to understand the full sale process and set a realistic timeline.

Issue 2: Not Understanding the Business Structure

There are many ways to operate a business, for example:

Operating as a sole trader;

Operating through a company;

Operating through a partnership;

Operating through a trust, etc.

Many sellers in fact do not understand their own business structure. A typical situation is a business operated under a trust structure, where the business is managed by a company acting as trustee. When selling the business, listing only the trustee company as the seller is incorrect. If a holding company owns certain intellectual property but the business is actually operated by a subsidiary it controls, then both companies should be listed by the seller.

Issue 3: Clarify Ownership of Business Assets

In some cases, a business’s assets may already be mortgaged or secured to a third party, and the security will be registered on the Personal Property and Securities Register (PPSR). Security registrations come in many forms — the security can be over a specific asset, such as machinery or equipment; over business premises, such as real property; or even over the entire business’s assets.

When a seller leases or finances equipment, a PPSR registration is made, and then a loan is obtained from the bank. Even under the payment terms in agreements with suppliers, a PPSR registration may limit the seller’s legal ability to transfer ownership of the asset. A business sale agreement will usually stipulate that the sale must be completed free of encumbrances. The seller therefore needs to speak with the entities holding PPSR registrations over the business assets. Through this process, the seller can find out what is required to release the PPSR registration. This process may delay completion of the sale, and we recommend engaging a lawyer to assist.

In short, a business’s assets may not be wholly owned by the business — for example, financed vehicles, equipment, and real property. When buying a business, it is essential to verify the ownership status of the business’s assets.

Issue 4: Not Engaging the Right Advisers

When selling a business, it is essential to consult with professionals. Although the buyer and seller may already have advisers, those advisers must have experience in business sales. Types of advisers to engage include:

Accountants or tax advisers;

Lawyers;

Business brokers

An accountant or tax adviser can help value the business and determine the tax implications of selling it. A lawyer will assist with signing contracts, negotiating, and completing the transaction. A business broker can help the seller find a qualified buyer. This last point is very important, because the buyer’s credentials will need to be approved by the landlord (if required), and they may also need to provide proof of funds to show they can afford the purchase price. It is important to involve these professionals early in the sale process, as they can help guide the seller through the process and timeline.

Conclusion

In summary, buying and selling businesses is very common in Australia, especially under the impact of the pandemic. Many small business owners may want to sell their existing business, and because it is so common, both buyers and sellers easily overlook important details — in serious cases, this can lead to significant financial loss. Buying or selling a business is a high-value transaction, and we recommend consulting a qualified lawyer when dealing with these matters.