Many small business owners have been affected during the pandemic, and many may be considering selling their business. If you are preparing to sell a business in Australia for the first time, it is important to note that throughout the process you will need to consult both a lawyer and an accountant, and fully prepare all documents required by both buyer and seller to help the sales process run smoothly.

Drafting a Contract for Sale of Business is Essential

Before selling a business, the seller’s lawyer will draft a Contract for Sale of Business, setting out standard terms and conditions, which typically include:

1. Business name and price

If the business name is registered, a transfer needs to be completed with ASIC. The price is generally made up of two components: Goodwill and Equipment, and you also need to consider whether there is stock in trade.

2. Intellectual property

When selling a business, the seller may choose to transfer any registered trademarks to the buyer.

3. Existing employees

The seller needs to confirm whether the new buyer wishes to retain the existing employees.

4. Trial period and training period

The seller needs to confirm whether a trial period or training period will be offered to the buyer.

5. Settlement process

The contract will specify the buyer’s payment method and how settlement takes effect.

During the Entire Sales Process, the Seller Needs to Prepare the Following Materials

1. Financial records: including three years of financial reports, business activity statements, profit and loss statements, and detailed expense breakdowns.

2. Lease: including the lease document, rental invoices, utility and miscellaneous expense invoices, etc. If the lease is about to expire, it is best to ask the landlord or agent for a new lease proposal with indicative terms for the buyer’s reference.

3. Employee structure and wages: how many employees there are, the specific responsibilities and experience of each employee, the work undertaken by the owner, and whether the owner draws a wage.

4. Business-related contracts and invoices: if it is a franchise/chain type business, a franchise contract and invoices must be provided; provide as many past contracts and invoices as possible so that cost composition is clearer and the stability of the business can be assessed.

In addition, the buyer will often include a “restraint of trade clause”. As the buyer, they typically do not want the seller to open a similar shop nearby after selling the business, so the buyer generally requires a restraint clause. For example, the seller may be prevented from opening a similar restaurant directly opposite the one being sold.

Of Course, as a Buyer

There are also many matters to consider before buying a business, and a lot of groundwork needs to be done in advance

1. Consider how the business is valued

You can ask the seller or the business representative how they arrived at their asking price. Although there is no set formula — ultimately a business is worth what a third party is willing to pay — most businesses sell for 2 to 4 times their earnings (after wages are deducted).

2. Consider what you are buying

A business sale will take the form of either an asset sale or a share sale. An asset sale usually reduces the risk for the buyer.

3. Pay attention to the Business’ Financial Records

If you want to buy a business, it is recommended that you ask the seller to provide and allow you to review the following financial records: 

The business’s accounts for the most recent two financial years (Profit and Loss and Balance Sheets); 

The current year’s financial position; 

Business Activity Statements (BAS) for the past four quarters; 

The most recent income tax return; and

A list of each asset that will be included in the sale of the business.

Note: You should physically inspect the assets and record the asset valuations during the sale process.

4. Consider whether the financial records are accurate

You need to break the financial records down and confirm their accuracy. For example, compare coffee sales with the kilograms of coffee the business has purchased. You can also look at website traffic to see whether the numbers match what has been provided.

5. Will you retain the existing employees?

Generally speaking, if you are only purchasing the assets of the business, employee entitlements will not transfer to you as the new owner. Instead, the current owner of the business will terminate the employment relationship on the final day. The new owner can then offer new contracts to the employees.

6. What is a Trial Period?

The most important step in verifying revenue is to agree on a minimum trial period. During the trial period, your minimum sales should be no lower than the average turnover provided in the most recent financial records. The trial period should be no less than 7 days to avoid a particular day of the week skewing turnover.

7. Consider other stakeholders

One of your best sources of information can be the employees, suppliers and customers. Take every possible opportunity to speak with them and ask questions about the business you intend to buy.

8. Have you engaged a Business Broker?

Business brokers take a commission from the sale of a business, so choose carefully and be cautious.

9. Have you prepared a business plan and financial forecast?

Take the time to develop a solid business plan and financial forecast, and understand the drivers of the business. When you buy and run your new business, this business plan can serve as an important reference.

10. Has a lawyer reviewed the sale of business agreement?

Make sure your lawyer carefully reviews the following: 

– The Contract for Sale of Business; 

– The lease assignment or new lease; and 

– Legal due diligence.

11. Does the business require any permits or licences?

Obtain copies of all relevant permits and licences (for example, a liquor licence or local food licence). You can contact the regulator directly to ensure the licence is valid and can be transferred at the time of sale.

12. What is the Handover Period?

– The seller of a business will have built up a network of relationships with customers. However, if the seller suddenly leaves, these previously maintained relationships may disappear.

– To minimise this impact, it is best to include a transaction and training period in the contract. This gives you an opportunity to be introduced to existing customers, and allows the seller to be available to answer any questions you may have about the business.

– When does the handover period start: once the seller has sold the business to the buyer, the handover period begins. This is the seller’s opportunity to introduce the buyer to their customers and other business processes.

Finally

Before buying or selling a business, whether you are the buyer or the seller, it is critically important to fully consider the issues above and conduct proper due diligence. As a seller, you need to prepare a significant volume of documents in advance so that the sale process runs smoothly; as a buyer, thorough background investigation is essential — there are many detailed areas to review. If you are planning to buy a business or company, it is strongly recommended that you seek the assistance of a professional lawyer.