We are often surprised at the amount of business-owners that reduce the profitability of their business in the eleventh hour by ‘going it alone’ when
they sell their business. Business owners spend countless hours and expend significant effort, expense and entrepreneurial stress in running and
building up their business so that it may become a saleable asset. However they seem very reluctant to make the additional investment by getting
specialist business lawyer to help them negotiate and handle the sale of the very thing that they have invested so much into.
Although I do not doubt the negotiation skills or the knowledge of a business owner within their industry, there are several legal minefields that an
experienced lawyer can assist the seller to navigate and optimise the outcome for all parties.
What are you selling?
The first point to consider in selling a business is exactly what it is you are selling. Not only will this help you determine a price but it ensures
that there is a clear understanding between the parties about what the buyer will be receiving in exchange for their money. Your business broker,
accountant and solicitor should work together on this issue to ensure that the sale contract is prepared with all of these issues and that there is no
miscommunication.
The aspects that should be considered include the goodwill, fixtures, fittings, furniture, chattels, plant and equipment, industrial and
intellectual property, work in progress (if any), permits and licenses and any other assets required to operate the business.
You may also wish to exclude some items which the buyer would ordinarily expect to receive as part of the sale.
The goodwill
The goodwill is the measure of how the market views your business but is obviously something that you cannot touch.
However it is usual that a portion of the purchase price which you are asking is attributable to goodwill. The goodwill can be harmed, for example,
if you set up a competing business. Accordingly, you should expect the buyer to impose conditions preventing you from affecting that goodwill after
completion of the sale. This may be in the form of a restraint on when, where, how and if you can establish another similar business which may compete
with the one you are selling. This can be a problem in particular with sole traders but can also extend to key employees within larger businesses.
Any restraint of trade in the business sale contract must be reasonable otherwise the Courts will not enforce them and they will be invalid.
Determining what is reasonable is best determined in consultation with a lawyer who drafts appropriate restraints of trade according to the law in this area.
Furniture, chattels, plant and equipment
These are the physical “things” that you are selling. Anything physical that you are selling should be contained in the schedules attached to the contract.
Similarly, if there is anything important to you that you wish to keep, these must be dealt with specifically in the business sale contract so that
the buyer is aware that they will not be receiving these items as part of the sale. Your solicitor will be able to write appropriate special
conditions into the business sale contract to deal with this.
Things that are leased or partly owned should also be listed exhaustively to avoid confusion and possible misrepresentation.
If there are items that are leased or rented, the agreements relating to these items (such as a phone system or motor vehicles etc) must be transferred
to the buyer on or before settlement. Quite often this transfer will involve you signing a transfer agreement stating that you agree to continue
to be bound by the contract even though the buyer is now in your place. This allows the business who has leased the items to you to chase you if the
buyer does not meet their end of the bargain. You should ensure that you properly understand the terms of the transfer by referring it to your solicitor.
Industrial and intellectual property
This type of property is quite far ranging. Common examples of this type of property include website domain names, websites, procedure manuals,
logos, trademarks, business names, patents etc. Items of this nature that are of great importance to the operation of the business should be specifically
mentioned in the contract. Again some of these items may need to be transferred. You may not know how to do this but your solicitor will be able to
show you the way.
Permits and Licenses
Most businesses require some sort of permit or license to operate. As the seller of a business, one of your obligations is often to sell the business
with the permits and license required to operate it. If you are unsure if your business holds those that are needed, you should contact your solicitor
who will be able to tell you which ones you need and to assist you with transferring them.
Problems with the Business
A business sale contract usually includes a provision that there are no demands against the business that may be a problem. In particular,
that there are no outstanding demands, requisitions or notices about the business or the premises. For example, a notice from the local council that
the premises are too dirty to operate a food business and must be cleaned. Such things will usually come from the government or other bodies that regulate
the type of business which you operate. They can even be issued following an inspection of the business and the premises requested by the buyer.
If there are any outstanding requisitions then it is up to you to fix the defects at your cost (unless the contract provides otherwise).
Your solicitor can prepare a clause to deal with this so that your exposure is limited.
