The what, when, how and why of a business sale and purchase.
Why are you looking to sell – your objectives should be clear so that you can then ensure that the business sale/purchase agreement reflects that intention.
There may be a variety of reasons for intending to dispose of a business, e.g. retirement due to age or ill health, to undertake a different venture, to dispose of an unsuccessful or deteriorating business or to realise a capital profit after having built up a business. The actual reason for the sale is important because intending buyers are likely to inquire about it and are entitled to an honest answer. The reason for the sale and its urgency will also influence how and when the business should be marketed for sale.
For instance, if you are looking to sell your business to retire then you may consider providing vendor finance to the purchaser (vendor finance is when the seller of a business helps in providing funds to the purchaser – generally by allowing the purchase to pay off the purchase price over a period of time). If however, you are selling your business to fund another purchase then you would generally not consider vendor finance but rather look to receive a lump sum on completion of the transaction.
How does a business sale take place?
1. Deposit – the buyer may put down a deposit
2. Contracts – generally the seller provides the sale contract to the buyer or to the buyer’s contract lawyer
3. Due Diligence – the buyer will want to check the business out thoroughly
4. Negotiation – the parties will negotiate the clauses of the contract (generally through their lawyers)
5. Completion – the date on which ownership passes and the buyer pays the purchase price to the seller.
What things are relevant in a business sale/purchase?
1. What is included in the sale – this includes discussion and agreement about things such as stock, assets of the business, and employees (which ones want to stay and which ones want to resign).
2. What is the restraint of trade – this is important as it stops the seller starting up a competing business within a certain area for a certain period of time and can be crucial to the buyer’s successful operation of the purchased business.
3. What warranties or promises does the seller make – these are important for the buyer so that the buyer has some comfort that everything is above board and the figures and other information provided by the seller about the business are accurate. Generally, buyers are looking to use the business as their primary source of income and in some cases will have to borrow money to fund the purchase so it is very important that these warranties but appropriate for the circumstances.
When will I get paid?
Generally, the seller gets paid on settlement or completion. This is a date that is agreed to in the contract by the parties.