In the financial planning world, it is often said that the best time to start saving is 10 years ago. The same can perhaps be said for when the best time is to draw up (or at least think about) the documents for the sale of your business. When reading through a draft sale of business agreement, sellers will see items requiring consents to be obtained, third parties to be notified, resolutions to be drawn up, and perhaps agreements with third parties to be renegotiated. They may see a number of items which they would like to have removed (such as onerous warranties) but in the absence of which a purchaser would be unwilling to proceed with the transaction.
The decision to sell your business (a broad term for a transaction which could take different forms, such as a sale of assets of the business as a going concern, or the sale of the shares in a company which owns the business or a share buy-back if one or more shareholders are selling out to an existing shareholder) can be made without too much delay. The same cannot always be said for the documentation required to record such a sale, and the myriad legal requirements which often need to be met. Careful planning and adequate preparation are advisable.
When a business starts trading, the format of the agreements which it has in place, such as with a landlord, suppliers, employees and clients, often take a back seat to other aspects of the business. As the business progresses, the need for other agreements also arises, such as agreements to protect the assets which the business may acquire or create, both tangible and intangible. It is the format of these agreements which, if carefully drafted, will be able to give the seller comfort when it has to give warranties to the purchaser, and fulfil conditions precedent, when a written sale of business agreement is being drawn up.
Although agents or business brokers can be well placed to market your business and obtain the best possible selling price, an attorney is an important part of the sale process and it is very advisable to have your own attorney (whether you are the seller of the purchaser of the business.)
The decision regarding the structure of the sale itself will also need to take tax considerations into account in order to maximise the return on what you receive for your business. A qualified tax advisor will be able to provide the necessary input for this aspect of the process at the beginning stage.
Agreement of Lease
One of the conditions precedent (a provision which must be fulfilled for a sale to be able to proceed) of a sale of business will almost certainly be the requirement that the agreement of lease for the premises at which the business operates, is ceded to the purchaser of the business, or that the seller of the business warrants that there is no condition in the agreement of lease which could trigger termination of the agreement of lease in the event of a change of ownership in the lessee (ie, the entity which is the lessee when there is a sale of shares.) When first negotiating a lease agreement, be sure to check whether the lease is able to be ceded, or whether there is a ‘change of ownership’ clause which could trigger a termination of the lease agreement.
Agreements with Suppliers
Suppliers often provide important services to your business. A sale of business agreement may similarly require that agreements with suppliers be ceded to the new purchaser (alternatively, will not be in danger of being terminated due to a ‘change of ownership’ clause, similar in nature to the clause discussed above.)
It can happen that suppliers of services, such as development of software applications (apps) and websites, incorrectly reflect in their records the name of the party for which services are being provided. Websites, digital distribution (‘app stores’) and data hosting platforms may inadvertently record and reflect the name of the person, who may be an employee of the business or independent contractor, who is instructing them to provide the services, instead of the business itself.
A purchaser of a business may require warranties with regards, for example, to software development and the related copyright, and this may then require that a written agreement be entered into with the supplier of the business’ software (if there are concerns regarding the authorship and ownership of software or if an existing agreement perhaps needs to be amended.)
Agreements with Employees
Employees are, more often than not, key to the day-to-day functioning of a business. There are a number of legal requirements when it comes to how employees need to be provided for and the protections which are afforded to them when a business is sold. Similarly, when employing staff, regard should be had to whether restraints of trade, minimum notice periods and confidentiality are appropriate provisions to be included in employment agreements at the very beginning of the employment relationship. Such provisions can enhance the value of a business. When a sale of business is imminent, employees need to be made aware of the law which is applicable to them; key employees may also need to be included in the negotiations for the sale if a prospective purchaser will require their services for any minimum length of time after the sale has occurred.
Agreements with Clients
Clients may not be as enthusiastic about the sale of your business as you are. They may have come to rely on your business being run as smoothly as it has always been, and a sale of business may cause concern that things may change. The same difficulties, regarding termination, raised above for agreements of lease and agreements with suppliers, also apply to agreements with clients. Alternatively, existing written agreements may have provisions which need to be complied with, such as notification in writing within certain time frames of the impending sale.
When initially drawing up an agreement with a client, it will be beneficial to negotiate a written agreement which will facilitate a smooth transition to a new owner of your business sometime in the future, such as a clause which provides for written consent to cession of the agreement not to be unreasonably refused by the client.
Once you have decided to sell your business and you have a purchaser, it is important to waste no time in commencing with the drawing up the sale of business documents. A sale of business agreement should not be the last item to be attended to once all the negotiations are concluded. It should form part of the discussion from the very beginning of the process. Do not underestimate the time is takes for an agreement to be drawn up, for the negotiations to take place between the seller and the purchaser, and for all conditions precedent to be met, and in addition, for any other ancillary documents to be drawn up as well, and for any related requirements, both legal and contractual to be met.
This brief discussion on this sale of business topic raises only a few of the matters which may arise in such circumstances, is only a guide and does not constitute legal advice. Please feel free to contact us should you require any further assistance.