There are two common ways to sell in a business sale. It is important that you understand the differences between them because the process and associated risks involved vary between the two.
A basic understanding will allow you to highlight the strengths of your business and repair or minimise the risks. You can either sell your business through a:
A business sale, or asset sale, refers to the sale of the business assets from the current owner to a buyer. The seller and buyer can be different entities (such as a sole trader, company or trust) but the distinctive feature of an Asset Sale is that the business assets change ownership. This can include:
A share sale involves the sale of the shares of the company that owns the business. This means that the business assets do not change ownership, as they continue to be owned by the company. The ownership change occurs by way of the shares being sold from the current shareholder to the buyer, who will own the shares of the company after the sale has completed.
A business sale can be more complex from a process perspective as you need to transfer all of the business assets, including contracts, to the buyer. Transferring contracts involves obtaining the consent of the other parties to the contract. This applies to leases, franchise agreements, employee agreements and client agreements. The type of business will determine the other steps and documents required, but the typical process is that the:
1. seller’s solicitor prepares the draft business sale agreement (BSA);
2. BSA is negotiated between the seller and buyer, with advice from their solicitors;
3. BSA is signed and the buyer pays a deposit, typically 10% (Signing/Execution);
4. conditions precedent are completed (these are the necessary steps between signing and completion); and
5. purchase price is paid and business assets are formally transferred to the buyer, known as settlement.
Conditions precedent are events that must occur before the sale can complete. These usually relate to the transfer of business contracts. This is because the business owner is changing, which means the parties listed in the various contracts will be different after the sale completes. If there are several key contracts used in the operation of the business, it is important that you ensure these can be transferred. If there is a lease, which is a type of contract, you will require the consent of the landlord to the buyer becoming a tenant. You, the buyer and the landlord will need to enter a deed of assignment to transfer the lease. If the landlord or party to another key contract refuses to transfer the contract to the buyer, this can frustrate and block the sale process. The landlord may still require that a BSA is signed prior to considering the buyer as a tenant, which can be frustrating if they end up blocking the sale.
In a share sale, the business assets (including business contracts) remain with the company. This means that no consents are necessary, which can result in a simpler process. This also means that all employees will continue to be engaged by the company. The exception is where there is a ‘change of control’ clause in the contract. This means that consent is required when the company shareholding changes. This is common in government contracts, leases and franchise agreements. In this case, you will need to go through a similar process as under a business sale. The formal agreement is a share sale agreement, which sets out:
In addition, you will need to:
It is important that you have discussed in detail the type of sale you wish to complete. You should consider the contracts that are used in the operation of your business. If there are many contracts to transfer and you own the business through a company, then a share sale may result in a smoother process. All contracts should also be examined for ‘change of control’ clauses as consent may still be required in a share sale. If you have any questions about buying or selling shares or a company, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.