This article outlines considerations during the stages of selling your business, from before the exchange of contracts to settlement, and any tax implications.
Selling Your Business
When selling your business, you will first need to decide if you are selling the company itself (and therefore, selling the shares in the company) or just selling the business and its assets. You will need to have the business valued by a business valuer. You must then decide on the price you are willing to sell the business for. If a buyer has not already approached you directly, you will then need to advertise the sale, either personally or through a broker.
A lawyer can only provide you with legal advice, not financial advice. If you require financial advice (e.g. how much you should value the business, whether it is the right time to sell the business), you should speak with a financial advisor.
Transfer of Ownership
If the ownership of a business is not effectively transferred to the purchasing party, this may later cause you legal difficulties. To make sure that you are transferring all ownership of the rights, responsibilities, liabilities and assets of your businesses, you must understand what these items are and that they are included in the Contract for the Sale and Purchase of Business 2021 (NSW).
Assets that you can transfer during a sale of business include:
- goodwill and stock-in-trade;
- contracts with suppliers;
- licenses and permits that purchaser may need to conduct the business;
- leasehold interests, if you are currently leasing a business premises which the purchaser may wish to use after the sale;
- your intellectual property rights in the business name or logo; and
- franchise agreements.
Before Exchanging Contracts
Usually, a standard contract for the sale of business is used for the sale of a business. This contract contains extensive clauses that cover all legal requirements under Australian law. However, as all businesses are different, you may need to add clauses or special conditions to your contract. Special conditions can be added to the end of the contract. These must be drafted properly to avoid any uncertainty or confusion. The purchaser will use this time to conduct preliminary searches, reviews and inspections of the business documents and premises to familiarise themselves with all the aspects of the purchase.
Exchange of Contracts
Following completion of all negotiations on the contract terms of the sale, you and the purchaser each sign an identical copy of the contract and exchange them. It is your responsibility to arrange for a time and place for exchange of contracts. After exchange, the contract is legally binding. The purchaser will usually give you a cheque for the deposit during exchange.
During this stage, you are required to fulfil the obligations outlined in the contract. There are standard obligations and there may be additional obligations in the special conditions that you must fulfil. Some standard obligations are:
- completing all documents required to transfer ownership to the purchaser;
- getting the landlord’s consent to transfer the lease to the purchaser;
- discharging securities, mortgages or any other encumbrances held over your business; and
- maintaining your company’s goodwill;
At settlement, you may need to exchange certain documents. You will have to provide the purchaser with documents passing ownership rights to them. The purchaser may give you bank cheques or deeds in return. For example, in the case of a share sale, you may give the purchasers:
- share transfers;
- a director resignation document;
- an appointment of directors document;
- approvals for share transfers;
- share certificates; and
- items listed in the second schedule.
In exchange, the purchasers may give you a:
- bank cheque for the sale price of your business or the shares;
- signed deed of guarantee by the purchasers; and
- deed of guarantee if there is a lessor.
After settlement, the purchaser has to undertake tasks to ensure that they have full ownership of the business. Your lawyer has tasks to complete to ensure the cessation of your responsibility for assets transferred to the purchaser. These may include:
- cancelling any licenses and insurance in your name relating to the business;
- handing over any stock or inventory;
- sending an order to the agent that the purchaser’s deposit is to be transferred to you;
- giving the new owner a list of passwords to accounts;
- ensuring you pay out staff leave entitlements for any staff the purchaser has not taken on;
- finding out from your lawyer the settlement proceeds, and your lawyer’s costs;
- transferring assets into the new owner’s name; and
- passing on the business client list.
Taxes – Including CGT, GST and Other Costs
A major concern when selling a business is the tax implications the transaction may attract. You should consider any taxes that may apply, which may reduce the money you end up with after the sale. If you are registered for Goods and Services Tax (GST), you may be liable to pay GST. However, if you sell your business as a going concern, the sale may not attract GST. If your business is being sold as a going concern:
- the purchaser is registered for GST; and
- you will sell the business in return for payment; and
- you are supplying everything to the purchaser so they can continue operating the business;
- you have agreed with the purchaser that the sale is of a going concern; and
- your intention is to carry on the business until you sell it to the purchaser.
If you sell your business and make a profit, the profit may be subject to Capital Gains Tax. This tax applies to any:
- intangible assets (e.g. intellectual property);
- business assets; and
There are tax concessions that may be available to you as a small business owner. The sale of your business may also be subject to transfer duty, which the purchaser must pay.
While selling a business can be very exciting, the process can also be rather tricky. It is a good idea to get legal assistance during this time so you are aware of all your risks, obligations and duties as the seller.