Ben Wilson, Partner at CCK Lawyers, discusses the process for the sale of a family business and the key factors that should be taken into account. This article is part 1 of a 3 part series which recaps the key points from Ben’s recent presentation for Legalwise at the Family Business Advisory Conference. In Part 1, Ben will consider what a seller should expect during the process of a typical business sale. Part 2 will explain how to determine whether the family business is ready for sale. Part 3 will conclude the series by explaining how best to present the family business to potential buyers.
What to expect during a typical business sale process?
The first stage of any sale is making the decision that it is the time to sell. That decision can be driven by a variety of factors, such as personal or retirement goals of the principal or a view that the value is at a high point and that the principal has taken the business as far as they can. In other situations, the decision may be thrust upon a seller (for example, if an approach is made by a competitor or a potential buyer).
Once this decision has been made it is critical to engage with an accountant, financial planner, lawyer, and tax advisor. Those advisors should work together to allocate tasks and responsibilities and set timelines. Often one advisor will need to take the lead to ensure that everyone remains on track. It may also be necessary to engage a corporate advisor to assist with deciding the best way to market the business and to determine the appropriate value and sale price.
Once an in-principle decision has been made to sell, consideration should turn to whether there should be consultation with key stakeholders. The timing and strategy of this is critical. You want to make sure that everyone is informed and on board with the sale. The consultation process might also elicit possible purchasers. However, you cannot tell certain people too early (such as customers and employees) as this might create unnecessary tension, uncertainty and lack of motivation.
The advisors will assist in exploring the different sale processes by taking into account tax consequences, potential buyers and sale price of the business. There are two categories under which family businesses are usually sold. A trade sale, which can be seen as a clean sale, much like a standard sale of a residential property. The business will be advertised, and the terms of the contract will be negotiated. Alternatively, a tender process, which can be seen to be more like an auction.
Preparation for Due Diligence
The sale process usually includes the buyer undertaking extensive due diligence on the business. Accordingly, it is important, as a seller, to be ready for that process. Any areas that are likely to be of concern to a potential buyer need to be identified and where possible, the issues should be rectified. Alternatively, a proposed solution for how to address the buyer’s concerns needs to be formulated. It is usually best to be open and upfront about these issues and try to work through them.
Before engaging in discussions with stakeholders or potential buyers, it is important that a confidentiality deed is entered into, which addresses the purposes for which the information is being produced, the steps the recipient must take to keep the information confidential and require the deletion or return of the information after a specified time.
The due diligence process usually involves two phases. First, the seller will request financial information and some key documents, which will give them enough information to decide whether they want to take the process further. Subsequently, the buyer’s attention will turn to negotiation and entering into a contract, but often subject to a more detailed formal post-contract due diligence process.
Unless the sale is being conducted by way of a fixed request for tender process, an offer will put forward a proposed purchase price and various terms. If the proposed purchase price and the various terms are not acceptable to the seller, there will be some back and forth and clarification through a negotiation process.
Letter of Intent, Heads of Agreement or Memorandum of Understanding
Once the key terms of the sale have been agreed in principle, the parties should enter a brief document which formalises those key terms. A document like this also ensures that the lawyers receive clear drafting instructions for the formal documents that will follow. It needs to be determined whether the documents is intended to be non-binding, fully binding or partly binding. To avoid dispute, this should also be set out expressly and clearly in the document.
After the Letter of Intent, Heads of Agreement or Memorandum of Understanding has been prepared, a more detailed formal document will be prepared. The key issues to address in such a formal document will include:
1. conditions to completion;
2. purchase price and deposit;
3. GST nature of the transaction;
4. completion/settlement procedures and documents to be handed over;
5. process for assignment of leases, equipment leases and other contracts;
6. employee transfer procedures;
8. non-compete arrangements; and
Preparation for Completion
Once the contact has been agreed and signed, the parties must work towards completion. A completion checklist should be prepared, which sets out the tasks to be completed, the time by which they are to be completed and who is responsible for each task. More documents need to be prepared through this process, including deeds of consent, deeds of assignment, and so on. It will also be necessary to arrange for guarantees given by the principal of the business to be released.
By completion day, most of the hard work should have been completed. There is usually a physical face to face meeting at which the original signed assignments, transfers and so on are handed over. The buyer will check that they have received everything required for the sale and then a cheque is passed over for the adjusted purchase price.
After the excitement of completion, it is important not to forget to attend to the steps that need to be dealt with post completion. For example, notifying ASIC of director and share changes, notifying councils and utility providers of changes, paying stamp duty on documents if required, seeking releases for any guarantees that were not arranged pre-completion, and monitoring compliance with ongoing obligations under the agreement.
The timing of the above steps can vary dramatically, and, on occasions, steps are missed due to commercial time pressures. For example, an orderly sale process arising from the planned retirement of the principal may take several years form the initial decision to sell until all post completion tasks have been undertaken. On other occasions, the process may take less than a month. Whatever the timeline for the sale, the key is to ensure that things are still thought through carefully and the steps are worked through in an orderly way.
The text of this article is only a discussion of principles and regulations. It is not to be taken as legal, commercial or financial advice as to any factual circumstances.
Ben Wilson was admitted to practice law in 2001 and was appointed a partner in 2008. Ben is an excellent lawyer, highly regarded in tax circles and a consummate adviser on private wealth and estate planning. Ben has a wide range of experience in corporate and commercial transactions, with a particular focus on taxation and revenue. Ben has extensive experience in preparing various types of commercial contracts including business sale agreements, share purchase agreements, standard terms, partnership agreements and other documents. Ben is a member of the Law Society of South Australia and a fellow of the Tax Institute. He is a former state chair of the Tax Institute, and its South Australian Education Committee. Contact Ben at [email protected] or connect via LinkedIn.