Are you planning to sell a business in Victoria? This is a lawyer's guide on the selling process. In this post we focus on the selling small to medium sized businesses, such as: restaurants, cafes, trades, franchises, manufacturing, medical, e-commerce, transport, service-based businesses and more.
Steps in selling a business in Melbourne & Victoria
The following are the general steps to selling a business in Melbourne & Victoria. Click on the link to jump to the relevant section of this post:
- Determine the value of the business.
- Prepare the business for sale.
- Create marketing materials to promote the sale of the business.
- Consider engaging a business broker.
- Review offers and negotiate.
- Enter into a non-binding head of agreement.
- Enter into a formal contract of sale of business.
- Complete contract conditions and prepare the transfer of all material contracts, staff and intellectual property.
- Prepare statement of adjustments and settlement statement.
- Settle the business.
- Post settlement support or obligations.
1. Determine the value of the business
The first step in selling a business is determining its value. Depending on the industry, your business might have a common valuation formula like 2-3 times annual profit, other businesses might be harder to value and have to be put to the market.
If you are unsure of the value, you can consider engaging an accountant, specialist valuer, or business broker to determine the value of the business. However at the end of the day your business is worth what someone is willing to pay for it - but it's good to have a starting off point.
2. Prepare the business for sale
The next step is to preparing your business for sale. This will involve getting your core paperwork in order (leases, licences, equipment lists, profit & loss statements, material records, systems, documents, contract, employee details), cleaning up the premises and stock, and making any necessary repairs or improvements. Your business will be much more attractive to buyers when everything is presented well from the get go.
3. Create marketing materials to promote the sale of the business
It's time to start marketing your business. There are several ways you can go about selling, be it yourself, online, reaching out to competitors, or engaging professional assistance. It is also helpful for buyers to prepare a information packet that contains key details about the business being sold.
4. Consider engaging a business broker
It is common for sellers engage the services of a business broker or consultant to assist in the sale of their business. This can be a good option, as many brokers will have buyers looking to buy similar business or experience in marketing them.
However, we recommend before engaging a broker, you have their retainer reviewed so you fully understand how and when they get paid, and delete terms you're not happy with. In our experience, we have seen a lot of unfair contract terms in business broker cost agreements and they can be confusing on when they are entitled to their commission and when their retainer ends.
5. Review offers and negotiate
Hopefully at this stage you will start getting offers for your business. It is time to negotiate and come to an agreement on the key terms.
6. Enter into a non-binding head of agreement.
To help get the terms of the deal organised, we recommend entering into a non-binding head of agreement. This is a document that outlines the key terms of the transaction that will be incorporated into the final binding contract.
This document is non-legally binding, but it helps get offers down in writing. We find this helps assist in negotiations and getting key terms fleshed out without the parties needed to get it first checked out by their lawyers. Our office can provide you with a template to use.
It is common for a buyer to pay a refundable holding deposit at this stage to show good will.
7. Enter into a formal contract of sale of business.
Once the key terms are agreed, our office will prepare the formal binding contract of sale of business that will bind both parties and contain all agreed terms.
Depending on the value and type of business you are selling, there could also be financial disclosure documents that need to be provided to the buyer for the contract to be binding, like a section 52 vendor statement.
Once the contract is signed, the full deposit will be paid into a trust account to be released once settlement completes.
8. Complete contract conditions and prepare the transfer of all material contracts, staff and intellectual property
Now that the contract is signed, it is time to start satisfying contract terms. A business sale can have several "subject to" conditions to be satisfied before it becomes "unconditional" and the parties proceed towards settlement, for example:
- Subject to finance.
- Subject to due diligence.
- Subject to trial period.
- Subject to health inspection.
- Subject to landlord consent to a transfer of lease.
- Subject to franchisor approval.
- Subject to liquor licence transfer.
- Subject to transfer of material contracts or licences needed to run the business.
- Discharge of any loans or PPSR charges over the business.
- And many more depending on the type of business you are selling.
Once the contract is "unconditional" you will organise any documents required to transfer the material parts of the business, like assets, intellectual property, leases, licences or employees if being transfered.
For employees, it is also important to understand if there will be a transfer of employees, and therefore a transfer of entitlements, or if there will be a termination of all employees, which for the vendor may then trigger redundancy payouts depending on the employee's status (full-time, casual etc).
9. Prepare statement of adjustments and settlement statement
Now that the business is moving to settlement, and the transfer of all business assets and contract are ready to be transferred subject to completion, a settlement date will be set. For this settlement a document called the "statement of adjustments and settlement statement" will be prepared.
This is a document that will adjust any ongoing business outgoings like rent, any customer credits, stock, an adjustment of any staff entitlements if staff are being transferred and so on, to determine the final money owing to the Vendor and how that many is to be distributed.
10. Settle the business
Settlement day has come and it's time for the Purchaser to pay the balance of the money owing and to hand over the business! Payment will be made by either bank checks or wire transfers. You have settled!
11. Post settlement support or obligations
Some business contracts will have post settlement obligations on the vendor, such as post settlement support and restraint of trade periods that need to be honoured.
Need help selling or buying a business?
We hope you now have a general understanding on how to sell a business in Victoria. If you need assistance in selling your business, feel free to reach out to our business lawyers in melbourne. Business transactions is one of our core practice areas and we have settled many businesses big and small.