Selling a business is often one of the most significant financial transactions of a business owner's life. Getting the legal aspects right protects you from future liability, ensures the buyer cannot come back with claims after settlement, and allows you to move on with confidence.
Asset Sale vs Share Sale
The first key decision is whether the transaction is structured as an asset sale or a share sale. As a vendor, the distinction matters for tax and liability reasons:
- Asset sale: You sell the business assets (goodwill, equipment, stock, leases, intellectual property) but retain the company. Historical liabilities generally stay with you, but so does the company shell. Capital gains tax applies to the sale of each asset.
- Share sale: You sell your shares in the company, and the buyer acquires everything including historical liabilities. Capital gains tax applies to the shares. The Small Business CGT concessions may be available if you meet the eligibility criteria.
Which structure is preferable depends heavily on your tax position. Always get accounting advice before agreeing to the structure.
Business Sale Contract
The business sale contract is the central document and must be carefully prepared. Key provisions include:
- What is being sold: An exhaustive list of included assets — goodwill, plant and equipment, stock, intellectual property, website, phone numbers, social media accounts, client lists, contracts
- Purchase price and adjustment: How is the price calculated? Is stock included and if so, how is it valued at settlement?
- Warranties and representations: What promises are you making about the business? Financial statements, undisclosed liabilities, employee entitlements, pending claims
- Restraint of trade: You will almost certainly be required to covenant not to compete with the business for a period and within a geographic area
- Conditions precedent: Finance, due diligence, and assignment of lease
- Employees: Which employees transfer? On what terms? How are entitlements handled?
Lease Assignment
If the business operates from leased premises, the lease must be assigned to the buyer with the landlord's consent. Start this process early — landlords can take time and may use the opportunity to renegotiate terms. You may remain liable under the lease as outgoing tenant unless the landlord releases you.
Employee Matters
In an asset sale, employees are treated as dismissed by you and re-engaged by the buyer. The buyer decides which employees to retain. Accrued entitlements (annual leave, long service leave) must be dealt with — either paid out by you or transferred to the buyer as an adjustment to the purchase price.
Restraint of Trade
A restraint of trade clause prevents you from starting or working in a competing business for a period of time and within a defined area. Courts will enforce a restraint if it goes no further than necessary to protect the legitimate interests of the buyer — the goodwill they are paying for. Carefully negotiate the scope of any restraint and ensure it is reasonable.
Tax Planning
The sale of a business may attract capital gains tax, GST, and other taxes. The Small Business CGT concessions can potentially reduce or eliminate capital gains tax for eligible small business owners. Seek accounting advice before entering any agreement.
At James Papas Solicitors, we have been advising on business sales in Western Sydney for nearly 50 years. Call us on (02) 9633 3122 early in the process — before you agree to anything in writing. Your first consultation is free.
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