Buying or selling a business? Consider the legals

There’s a lot to think about when you’re buying or selling a business. Entrepreneurs often get stuck into the details of the transaction without thinking about the legal issues they may need to deal with and how they intend to approach them.

This article is designed as a quick checklist, giving you an idea of the issues you will need to consider during the course of a business sale or purchase. You should think about these issues before you start negotiating the sale of business contract.

1. Scope of sale

The first issue the two parties to a sale and purchase of a business need to consider is the scope of the sale. The purchaser and the seller often have different ideas of what’s actually part of the business. Some of the typical assets to be included in a sale are:

(i) the name of the business;
(ii) property, plant and equipment;
(iii) customer and supplier contracts;
(iv) any information owned or used by the business;
(v) any other assets owned by the business (such as shares in other companies).

It’s important to nut out these details as early as possible. You don’t want to waste time and effort on negotiating if the two parties have radically different ideas about what will actually be included in the sale.

2. Apportionment

Once you’ve worked out what’s included in the sale, you need to apportion it between plant, equipment and goodwill. The general idea is that you will value the plant and equipment, assign a value to both, then assign the rest of the purchase price to goodwill. We won’t be going into the tax issues related to apportionment, talk to your accountant about this, but suffice to say there are obvious tax benefits (related to depreciation) in assigning as large a portion as possible of the purchase price to plant and equipment.

3. Non-compete and restraint

Another important issue to consider is whether the purchaser wishes to impose a non-compete or restraint on the seller. If you’re purchasing a relatively niche business, you’re not going to want the seller to be able to set up shop next door within a week of the purchase. Generally the parties might agree to a non-compete or restraint if the business is a niche player. It you’re selling a commoditised product a non-compete will be less of an issue.

4. Employees

It’s important that the two parties agree on the approach to be taken to current employees of the business before the sale goes through. Generally the employees will stay on working for the new owner; after all a successful business is dependent on great employees. If, however, for whatever reason the purchaser does not wish to retain some or all of the staff, the seller should be required to make the relevant employees, and bear that cost, before the business sale goes ahead.

5. Training period

Finally, the two parties should consider whether a training period might be useful. A training period is simply an agreed upon amount of time during which the seller of the business trains the purchaser post sale. If you’re buying a small business it makes sense to build in a training period clause into the sale of business contract.

Key takeaway

It’s important that you have a good think about the issues mentioned in this article before you move too far into a business sale and purchase transaction. As well as saving you time, you will save on legal costs; your lawyer won’t have to negotiate the issues for you!

About the author

Lachlan McKnight is the CEO of www.legalvision.com.au, which provides online legal services, including customised legal document and fixed-fee online lawyers.

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