Are you a startup founder or a business leader considering selling your business? Selling and exiting a business can be a rewarding yet challenging process. This guide will help you understand how to approach the sale from both a legal and strategic view so that you can maximise your return on investment while avoiding any disputes or hiccups.
Successful startups often generate large profits when they sell their business, but the process of selling a company is not always straightforward. Behind the scenes, a lot goes on to ensure a successful sale of a business.
Timing - Is it the right time to sell your business?
Determining the best time to sell is both art and science. There are several important factors to consider when planning to sell. However, the two factors that always have the most significant impact are 1) the economic and market conditions and 2) the growth trajectory of your business.
To maximise the sale value of a business, the stars must align. Your financial performance might be solid and lucrative, but the economy is in a recession or vice versa. Any uncertainty can lead to low interest and demand in your business and, as a result, low sale price.
Assuming the economic and market conditions are favourable, you always want to sell your business while financially trending upwards. An upward trajectory means that either your revenue or profits (or both) are growing significantly year after year. Business buyers are always looking for the return on their investment, and a growing business is a positive sign that they will be able to recoup their invested money faster.
Assuming the timing is appropriate, the next important part of the process is to create a bulletproof exit plan.
Your Business Exit Plan
One of the biggest sins in selling a business is lack of preparation. Being underprepared can risk the process and success of the sale and lead to disputes down the track. Involving your business lawyer and accountant early in the process will maximise the chances of your success.
Your exit plan should cover the below areas:
- Realistic (market-based) expectations on the value of the business
- The current financial performance and future forecasts
- Understanding and fulfilling your financial and legal obligations
- Documentation of the business processes
- Your legal and time obligations with the business after the sale
- List of Assets ownership including intellectual property
- Targeted buyers and your business sale pitch
Once your exit plan is intact, you can enter negotiations with potential buyers and go through the sale process.
Stages of selling a business
- Preparing the business sale agreement
When you sell a business, you and the buyer need to formally agree on the terms of sale, which include things like:
- The business sale price
- The transition duration
- Which assets you will need to transfer
- Your involvement after the sale
Your commercial lawyer is a crucial resource for your business, especially during the sale process. Not only will they protect your best interest, but they will also ensure the buyer does not have grounds to sue you or file a dispute during or after the transition period.
A lawyer will draft a contract commonly referred to as a sale of business agreement. There are standard templates for business sale agreements. However, most likely, your lawyer will modify it to suit the terms and sale structure you and the buyer agree on – including adding any special conditions needed. Once the sale agreement is finalised and approved, your lawyer will send it to the buyer and the buyer’s legal representative.
It is absolutely critical to involve a competent business lawyer in drafting and finalising the business sale agreement to minimise risk and exposure. Your lawyer will (and should) be looking out for areas of potential risk that you may not be aware of or unsure of how to address.
- Amending the sale
More often than not, the buyer will request amendments and changes to the business sale agreement. Every time they do so, your lawyer needs to be across the agreement and check all the clauses or amendments they made to ensure they do not impact you negatively during and after the sale
- Agreement Exchange and Settlement
Once you and the buyer have finally agreed on all the conditions and terms of the sale, you will proceed to exchanging the sale of business agreement and completing the settlement requirements. This process can be complex. So it is imperative to involve your lawyer to help you take the necessary steps to meet the settlement obligations.
Legal Considerations
What should the business sale include?
When you sell your business, you and the buyer need to be 100% clear on what the sale will include. A common reason for disputes after the business sale is a lack of clarity on what items and assets will be part of the transfer. For instance, you might assume that you will retain your customers’ database or specific equipment you have acquired in the past whilst the buyer assumes they will have full ownership of these assets.
Several types of assets can be sold or transferred during the process of a business sale. Some of these assets are tangible/physical assets like equipment and land, and some assets are not, such as website domains, business name, trademarks, technology, systems, etc.
Here are some of the typical business components that buyers expect to acquire when they buy a business.
- The business name, domain and website
- Customers data
- Physical assets the business owns
- Contracts the business has with customers and 3rd party entities such as distributors
- Intellectual property the business owns or has applied for
Should a restraint clause be included?
Many buyers may be concerned about you competing with them after they purchase your business. It is expected that buyers will demand a non-compete clause referred to as “restraint of trade”, which essentially ensures that you will not be operating in the same niche or sector for a period of time. If you intend on having a business in the same industry, it is crucial to ensure that the restrain clause outlines your rights post the sale.
For example, if you are selling a car dealership but plan to start a new business that sells technology or software for car manufacturers, your buyer might not be opposed to that. Still, you need to make sure the restraint clause does not stand in the way of your future business plans.
Are there training periods?
It takes time to hit the ground running and get up to speed when you take over a new business. Most buyers will expect training during the transition period. It is essential to agree on and outline the terms of the training period.
What about your employees?
Some buyers have intentions to make structural changes to a business they plan to buy. Structural changes are often made for strategic or operational-efficiency purposes. They might want to cut down on cost or bring new staff. It is up to the buyer to retain or let go of the current employees. However, it is your duty as the current business owner to fulfil your employees’ statutory obligations before the business sale. These obligations include things like paying for leave entitlements or performance bonuses.
Key Takeaways
The process of selling business can be time-consuming and challenging. Having a solid exit plan is a great start. However, to ensure your business sale is successful, you need to structure the sale appropriately through a business sale agreement and a clear transition process. If you need assistance with selling a business, our team of business lawyers at Lazarus Legal can help you. Leave an enquiry or reach us at 02 8644 6000.
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Mark Lazarus
Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.
