For many business owners, they’ve dedicated years and years of blood, sweat, and tears into their enterprise, hoping that one day, all their efforts will pay off when they sell the business. This, of course, is particularly the case for business owners who, perhaps, haven’t paid into a superannuation fund, who see the sale of the business as going towards funding their retirement. But, of course, when it comes to selling the business, there is a lot to it, and many smart people would say that your planning needs to start years before you hand over the keys.
In this podcast, OMB Solicitors Partner, Simon Bennett discusses the key things you need to consider for selling your business.
Dan: Well, today, I’m with Simon Bennett, a partner at OMB Solicitors. Simon, what is the starting point for a business owner contemplating all this?
Simon: I think, Dan, it comes down to organisation. A business owner who has put, as you said, years of effort and time into developing and growing their business, would like to maximise not only the price that they’re going to receive for the business, but the efficiency and speed with which that business will sell. Now, quite often, that process can be complicated by a seller not being organised. And what I mean by that is be organised in respect to all aspects that a buyer might want to look at. Any prudent buyer of a business will want to conduct a due diligence and those things will start with the information that I’m gonna talk about.
So some of the key items are your finances. You’ve got to have your books in order. You need to see a qualified and experienced accountant to make sure that your books and your financials are in order. Because no one’s going to buy a business and no one’s going to pay good money or top dollar for a business that can’t justify that purchase price or sale price with the returns. And a really prudent buyer will investigate those figures to determine the strengths and weaknesses of the business. So that’s the key number one. If they can’t finance the business through the figures, they won’t purchase it.
The second thing I’d say you need to look at is all the other bits. The ancillaries. So things like what licences do you need to run the business. If it’s a restaurant, have you got food licences in place? Is the business name in place? If those things aren’t in place necessary to run the business, you will fall foul of the purchaser, and potentially lose yourself the sale.
Then there are things like a business name. Are you operating under a business name? Is it registered and is it current? Because if someone is gonna buy value in a business, and that value includes the goodwill, which would include the name that the business is operating under, we want to make sure that that is current and up to date, and you’ve got the rights to it, not someone else.
We want to look at the equipment list. What do I get? A purchaser wants to know what does the purchase price include? Does it include stock? Does it include equipment? And with that equipment, is it owned outright, that is unencumbered? Is it leased? And if so, what are the terms? Or is it under a rental or some other form of agreement? And if so, again, what are the terms? Can they be assigned, or will a buyer take them over, or will you pay them out as part of the sale process?
So these are key elements that a seller can start to plan well prior to listing their business for sale.
Dan: Not to mention, Simon, even employees, as well. I’m assuming that there might be employment contracts that also need to be considered in the mix.
Simon: Yes, exactly. What’s going to happen? Are there key employees that must stay with the business? So if you put your shoes in the buyer’s position, if I’m buying a business, do I need that key employee, that key staff member business manager or what have you, to come over to enhance the goodwill of the business? If so, as a seller, I’d want to lock that employee in and make sure that I would be able to transfer them across to a new business owner and purchaser.
But it also leads into something else. Are they prepared, if the buyer wants them to, to stay in the business for a period? What would be the terms of that? Would it be documented? And if not, one of the key considerations for a purchaser, so therefore, the seller organising and thinking ahead will say, “Am I prepared to sign a restraint? So if I sell this business, am I then prepared to be restrained from competing against that business?” For example, again, in the food industry, if we were to own a restaurant, surely a purchaser will not allow us to compete within a certain area or radius because then we can erode their goodwill. So upfront consideration of these type of items is key to knowing what terms you’re gonna be listing your business on.
Dan: Simon, is it the case that for a person considering selling their business, that should happen, all the thinking should actually happen two years prior, three years, or five years? Is there any sort of recommended timeframe to do this work?
Simon: I think two or three years prior is too long. I think realistically, in the year you’re selling the business would be adequate. However, when you build your business, you should have consideration as to what will be valuable, not only in the continued operation but also valuable to a purchaser, and that might start a little bit further out. So the way you create and the way you grow your business should have some consideration as to what a reasonable purchaser for the value would pay for that. But I think in preparing for an actual sale, we’d want to be talking about the particular year that you were going to be selling it in, maybe a little bit earlier if you are really organised. But certainly, for something like your books, that should be a constant and an ongoing.
Dan: And getting legal advice as early as possible is obviously a no-brainer.
Simon: Well, I think it is essential. It is really so important. You wouldn’t certainly sign any documents associated with a business sale or purchase without consulting with an expert, someone who has substantial legal experience in these matters because the devil is in the detail, as with a lot of legal documents. The business contracts are no different, and they need to be specifically tailored to each business, each individual seller, and what that business entails. Without that, you can’t use any generic form of document because they’ve just got to be tailored to that specific business. What the buyer and seller have agreed between themselves regarding some of those items I’ve talked about. Really important. Get good legal advice to draught the document. So quite different to let’s say a residential or a basic property deal whereby agents in Queensland are commonly drafting documents. That would not be the case in businesses. You need to see your lawyer before documents are drafted to do the drafting for you.