Are you selling a business? You should consider doing vendor’s due diligence before signing the contract
If you are a small to medium size business owner and you are planning on selling your business, you should make sure that you are aware of the things that a potential buyer will want to see and will want to know about your business.
We have acted for many buyers and we always find that buyers want to know what they are agreeing to buy up-front before they enter into a contract.
For this reason, and to avoid any delays in completing your business sale, we strongly suggest that all business owners looking to sell their business get their affairs in order prior to engaging a buyer so that the transaction can run as smoothly as possible.
We have set out a “checklist” below which lists some of the key things that buyers will want to see prior to buying your business. This is not an exhaustive list and there may be things which are relevant to your particular business or industry which are not included here.
The buyer wants to see that the entity that is selling the business and the assets is the legal owner of the business and assets. If there are any discrepancies in this regard you should be up-front about this and make sure that the contract or contracts for sale reflect the correct legal structure.
Outstanding debts and security interests
A quick search of the Personal Property and Securities Register will reveal any registered security interests against you individually or your company. If any of these security interests relate to assets of the business then the buyer will not want to buy them until the debt has been satisfied by you.
The buyer will want to examine the records of the business so that they are aware of the financial position of the business before they purchase it. You should make sure that your records are up to date and clear. If there is any false or misleading information in your records then the buyer could claim that there was misleading and deceptive conduct.
The buyer will typically need to see the accounting records, financial statements and the directors’ statements and reports. You should also inform the buyer about the debts of the business, whether secured or undisclosed.
If you use a business name to operate the business then you are required to register that business name and this is something that the buyer will make enquiries about before they buy your business. The business name is typically sold with the business and will be transferred to the buyer on completion so it must be registered, and if it is not then you need to be up-front with the buyer about this.
Similarly, depending on the nature of your business there may be other licences that you should have in place which will be transferred to the buyer on completion (i.e. local council related licenses, liquor licences and industry specific licences).
The buyer will want to make sure that any contracts relevant to the continued operation of the business are in order, including:
- supply contracts;
- franchise agreements;
- employment contracts with staff; and
- leases and similar agreements.
The buyer may request that copies of certain contracts be included as annexures to the sale contract and they will want to review the terms, so it is prudent for you to make sure that there are contracts in place and that they are assignable to the buyer. We can assist with reviewing your business contracts prior to the sale.
It is typical to include details of all of the staff who work in the business in the sale contract so that the buyer is aware of who the employees are so that they can decide whether they want to keep them on or not once they purchase the business.
As the seller, you should make sure that you have employment contracts in place and make sure that you know all of the key details about the staff that the buyer will want to know (i.e. commencement date, position, length of service). You should also make sure that there are clear records setting out the details of your employee’s entitlements so that the buyer is fully aware of any ongoing obligations.
Intellectual property rights
Your brand, logo or other intellectual property may be one of the key factors in a buyer deciding whether or not to purchase your business. The buyer will want to know the nature of all intellectual property that you own so that they can check that the appropriate registrations are in place. You should make sure that your registrations are valid and that the buyer is made aware of any challenges to your intellectual property ownership.
You should also inform the buyer if there is any current litigation against you as this could have the potential to affect the value of your business and its assets. Likewise, you should ensure that all relevant insurance policies are up-to-date and that you disclose to the buyer the status of any major insurance claims against you.
We can assist you if you are thinking about selling your business and would like some advice to ensure that you have all the relevant information ready for the buyer.
Likewise, if you have already entered into negotiations or a contract to sell your business and the buyer has raised issues in relation to any of these matters, then we can assist you to attempt to resolve any issues as quickly as possible so that your sale can proceed. Call us on (02) 4904 8000, or click here to contact us via email.
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