After deciding to sell your business and finding a buyer, it may be tempting to rush through the sale process and move onto your next business endeavour quickly. However, it is important to carefully consider all the relevant legal issues in selling your business to ensure legal compliance and proper transfer of business assets including some you may not want to be included. This article outlines the main legal issues to consider in selling your business.
1. What is included in the sale of business?
Parties must agree on what is included in the sale of business. While this may seem like an obvious issue, it is often the source of subsequent legal disputes. Aspects which may be included in a sale of business include:
- The business name
- Any trading stock
- The goodwill of the business
- The property, fixtures and equipment of the business
- A list of client information
- A training period for the new owners
- Any agreements the business is party to e.g. supply and distribution agreements or retail leases
At the negotiation stage, it may be a good idea to draft a Heads of Agreement documenting the aspects included in the sale. This ensures that each party is on the same page before entering into a formal Sale Agreement which is legally binding.
2. Is there a restraint of trade?
Parties should consider any restraint of trade clauses in their agreement. A restraint of trade clause is designed to prevent the seller from operating a similar competing business after the sale. Generally, a restraint of trade will be made up of a combination of a region and time. Some examples of restraint of trade clauses include:
- ‘The seller cannot operate a similar business within 20 km of the business of sale’
- ‘The seller cannot operate a similar business within 12 months from the sale of business’
Importantly, a restraint of trade clause may be deemed unenforceable by the courts if it is too restrictive. As such, businesses should ensure that their contracts are properly drafted and contain no unfair terms.
3. Should I train up the new owners of my business?
You may wish to consider training the buyer in the management and operation of the business. Parties may include a training clause in their Sale Agreement which clearly sets out the duration and particular requirements of training. For example, a training clause may state that:
- The seller must introduce the new owner to key suppliers and customers of the business within 10 business days of completion of sale.
- The seller must provide a minimum of 8 hours of training on software and equipment used by the business.
Training may be completed before or after completion of sale. You are entitled to charge for your time for training and can include that as part of the transaction.
4. What happens to employees when I sell my business?
Generally, employees will continue their employment period under the new business owner. If employees are kept, the new owner must comply with the Fair Work Act and honour any employee entitlements such as sick leave, annual leave, and flexible working arrangements. If employees do not transfer to the new business, you may need to pay them out as a redundancy. In any event you would need to consider and forecast for entitlements.
The specific terms on transfer of employees should be stated clearly in the Sale Agreement. Importantly, if the buyer decides not to take on existing employees, the employees must be properly terminated, and all outstanding employee entitlements must be paid on or before completion of sale.
5. What tax obligations do I need to consider?
Parties should ensure they understand the tax consequences of the transaction before entering into a Sale Agreement. These may include:
- Goods and Services Tax (GST). If GST applies to the sale of the business, the purchase price will be impacted by an additional 10 per cent. GST may not be charged by the seller where the business is sold as a ‘going concern’ and all things necessary for the continued operation of the business have been provided to the buyer.
- Capital Gains Tax (CGT). The seller makes a capital gain upon the sale of the business, and this amount will be included in your assessable income. However, you may be eligible for a CGT concession depending on the circumstances of sale.
- Stamp duty. Different states and territories have different tax obligations regarding stamp duty. Accordingly, parties should ensure they understand whether stamp duty is payable on the sale of business assets before entering into a Sale Agreement. Stamp duty is a tax imposed on the purchase of assets and is generally paid by the purchaser of the business.
- In selling your business, it is important to consider what aspects of your business are included in the sale and any restraint of trade clauses.
- Sellers may wish to include a training clause in their Sale Agreement and provide the new owners with training on how to manage and operate the business.
- Employees are generally kept on following the sale of business. However, if the employees are terminated, they must be paid any outstanding employee entitlements before or upon completion of sale.
- Parties to a sale of business agreement should consider the relevant tax obligations in their transaction, including GST, CGT and stamp duty.
Gladwin Legal have extensive experience in advising businesses. We can help with drafting an agreement of sale or advise on the sale of your business in general. If you would like to know how we can help, please contact us at or 1300 033 934.