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Getting it right in business sale agreements

Getting it right in business sale agreements

By Carlo Furletti

Continuing Legal Education Practice & Procedure 

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The Australian Bureau of Statistics categorises a business size by the number of employees, the Australian Taxation Office categorises small business by turnover, the Estate Agents Act (Vic) 1958 defines business and small business differently.  I define a business as an activity being conducted by an entity using both tangible and intangible assets for the purposes of generating income and preferably making a profit.

It is essential to categorise the size and nature of the business so that legal requirements are met, in particular the delivery of a statement relating to the small business as defined prepared and completed in accordance with Section 52 of the Estate Agents Act prior to executing a Contract.  Failure to comply with that section provides the Purchaser with an exit from the contractual relationship.

It is important for practitioners to give some consideration and thought to the structure which should be utilised for the purchase of the business by the client. There are tax implications and succession issues which should be considered as well as structures for protection of other assets and minimising personal exposure. 

If a purchaser approaches a practitioner to give instructions to purchase a business, the best advice to be given by the practitioner to the purchaser is for him to conduct a very detailed due diligence into the nature, structure and soundness of the business activity. It may be too late after signing of Contracts to withdraw and most claims on warranties, etc would be restricted to damages.

Every business is different and accordingly, every sale transaction will be unique and specific provisions may be required to accommodate the particular deal. Precedents and checklists are important but not necessarily the solution to every scenario.

(i) It is important that the fundamental particulars of the sale be accurately detailed and comprehensively dealt with.

(ii) It is important that the tangible assets and the intangible assets be identified and appropriately dealt with particularly for the purposes of transferring those assets. Tangible assets such as plant and equipment, business names, occupancy rights, etc are relatively easily identifiable. Other assets of a business eg goodwill are generally more difficult to identify and to attribute a value. Goodwill generally represents the “profitability” factor of the business.

(iii) The purchaser should ensure that all the assets of the business sold are owned by the vendor and without encumbrance.

(iv) Any third party consents eg landlords and mortgagees of rented business premises, hirers of plant and equipment must be obtained. 

(v) Every agreement should provide that the vendor remains liable for any obligations and liabilities preceding the completion including any unsatisfied warranties, unredeemed gift vouchers, customer laybys, etc.

(vi) The rights and accrued entitlements of transferring employees and establishing and apportioning liability for those employees is an important element, as is confirming the basis of employment for those employees. From a vendor perspective it is important to determine at an early stage early what the Vendor’s liability will be to terminating employees.

(vii) A vendor should ensure that a corporate purchaser provides appropriate guarantees and security to secure its obligations. 

(viii) If the transaction involves retail premises the vendor should ensure that Section 62 of the Retail Leases Act is activated to gain the protection to the vendor/assignor and its guarantors of release from any liability under the lease being transferred. 

(ix) The vendor should ensure that any guarantees and like securities provided by him and associates are terminated or withdrawn.

(x) Stock and assessment of value of stock is a significant aspect of most sale of business transactions.

(xi) Every sale of business should incorporate sound warranties from the vendor relating to accuracy of information disclosed, transfer of assets and transition after settlement date. 

(xii) The purchaser would be wise to insist upon the vendor and associated parties providing non-compete undertakings for an appropriate (but not excessive) time and a radial distance from the business to protect the goodwill of the business in the short term.

(xiii) You should also ensure that the agreement satisfies the requirements of Section 38-325 of the GST Act to establish the sale is that of a “going concern” and exempt from GST.

 

Carlo Furletti, special counsel, Septimus Jones & Lee Solicitors

 

Want to find out more? Register for the LIV's Commercial Law CPD Intensive on 21 March where Carlo Furletti will be speaking on the above issues and more. For more information, see here.


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