The process of buying or selling a business is complex. As a general rule, you will spend a great deal of time on deciding what sort of a business to buy or sell, and working out an appropriate valuation.
Many businesses get to this stage and only then think about the legal issues they should be considering.
This is not necessarily a great approach. It’s important that you consider the important legal issues during the negotiations around valuation.
This article is designed to give you a heads up on the legal aspects of a business sale or purchase that you should be considering.
What’s included in the Sale or Purchase?
Although it would seem obvious that the parties to the sale and purchase of a business would need to agree on this point, it is a common trigger for disagreements. In many situations, the most important issue to agree on is what exactly is being included in the sale of the business.
Obviously the items being sold will change in line with the sort of business being sold, as well as the individual circumstances of both buyer and seller.
Some of the more important, and common, items include:
- shares in the company that operates the business (it’s important to note that this is unusual. A business is normally sold as a going concern; shares are not usually transferred);
- the plant and equipment that the business owns or operates;
- all of the agreements that the business is a party too (this includes customer agreements, commercial leases, distribution contracts, etc);
- all relevant information relating to clients;
- the business name;
- all the property owned by the business;
- anything else, whether tangible or intangible, that can be of assistance in operating the business.
Apportionment of the Purchase Price
As previously mentioned, the purchase price (as derived from the valuation) is generally the first item to be discussed in negotiations when selling a business.
There are a number of ways a business can be valued, including multiples and discounted NPV.
Regardless of how the purchase price is determined, it must them be apportioned between plant, equipment or goodwill.
Obviously a manufacturing business, with expensive machines, will apportion a higher percentage to plant and equipment than a service business, which will apportion a higher percentage to goodwill.
It’s important to note that the tax consequences of the sale will differ depending on how the purchase price is apportioned.
Will a Restraint be Imposed?
A restraint is an agreement between the buyer and the seller of the business. It ensures that the seller will not operate a similar business to the business being sold after the sale. Restraints are common when a niche business is being sold. They are less common in more commoditised industries.
A restraint will generally be geographic (e.g. within 3 kilometres of the site of the business) and/or time based (e.g. 6 months from the sale of the business). If a restraint is too restrictive it may be deemed unenforceable by the courts, so it’s important to make sure that this does not occur.
The buyer of a business will sometimes want the seller to stay on after the completion of the sale in order to train up the buyer in how to operate the business. This is relatively common in the sale of small businesses. Generally a training period will not last too long – between 7 and 28 days is relatively common.
Will the Employees Stay On?
As a general rule, the law will require the buyer to offer continued employment to the employees of the business before the sale goes through. The terms and conditions of the sale of business agreement will also generally cover this.
If the buyer chooses not to continue the employment of the employees for a legitimate reason, then the buyer should be required to terminate the employment of those employees prior to completion as a condition of the sale. Additionally, the seller should be required to comply with the law with regards to compensation.
It’s important to carefully consider the tax consequences of the sale before agreeing on the structure of the deal. Issues that should be considered from a tax perspective include:
- GST- GST may apply to the sale, or it may not, depending on the structure of the deal. If it does apply the purchase prices will obviously be impacted by 10%.
- CGT – Capital Gains Tax may apply in full, or the seller may be eligible for a concession (the most common one being the 25% concession for assets held over 12 months). The tax rate on the sale of the business that will apply to the seller can vary between 0% and 46.5%. Remember, the higher the tax rate, the more you will have sold the business for!
Buying or selling a business is an exciting time. Make sure you get the legal work done properly and always seek professional services from a reputable Solicitor.