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Top five issues to consider when buying or selling a business

This is a modified version of an article originally published for the Hire and Rental News magazine in May 2020 - Top five issues to consider when buying or selling a hire or rental business

How you sell or take over a  business may have different legal or tax implications. Typically, the transaction is done by either selling the assets of the business and its existing operations, or by selling shares in a company that operates the business.

You should seek professional advice to determine which option is best for you.

Beyond that, other issues to consider may relate specifically to the business itself, rather than the mode of transaction. These are the top five issues we find most clients need to consider when buying or selling a business.

1. Security Interests over Assets

Check whether any third parties have security over the assets proposed to be transferred on the Personal Property Securities (or PPS) Register. This is particularly important in an asset sale. If there are, you may need to talk with the secured parties to get them released so the assets can be sold free from encumbrances.

2. Third-Party Approvals and Consents

Do your customer and supply contracts require their consent before you sell your business? Typically, this is referred to as getting consent to a ‘change of control’, and is often found in customer and supply contracts, especially in relation to property leases.

If a contract is key to the business that you are buying, you want consent to appear as a condition to completion.

If you have any regulatory licences or approvals, you may also need consent from a regulator to get them transferred to the buyer or have the buyer apply for a fresh licence. If they are critical to the business, it is also important that this become a condition to completion so that you don’t buy a business that you simply cannot operate.

3. Existing Guarantees

If selling, have you given any personal guarantees in relation to your customer or supply contracts? Whether an asset or company sale, you will need to have those guarantees released before completion, otherwise you may be on the hook for things the buyer does.

4. Restraints

There are usually two reasons for restraints:

  • To protect the goodwill being bought by the buyer (that is, a seller’s restraint).

  • To protect existing customer and supplier relationships within the business.

To protect the value of the business, a buyer will normally ask for a restraint in the sale agreement. If the seller will be staying on in the business for any period, a restraint clause will also be included in the seller’s employment or consultancy contracts.

You should consider the scope of any restraint; in particular:

  • What it prevents.

  • Where it applies.

  • For how long it applies.

Restraints need to be reasonable in the circumstances. If they are too long or too broad, they may be unenforceable.

5. Warranties and Liabilities

A key area where the type of business acquisition will have significant implications are warranties and liabilities. 

While buyers should do their own searches and enquiries, certain things that are key to a business may be impossible to conclusively establish. For example:

  • That the seller is not insolvent.

  • That the seller has the power to sell.

  • That the seller has complied with the law.

For this reason, sellers are usually asked to give a representation or warranty about certain aspects of the business, and, where the whole company is being sold, significant representations or warranties about the company and its liabilities.

Determining whether representations and warranties have been breached can be difficult. Negotiations often feature thresholds and limitations designed to limit sellers’ exposure to liability and provide a balance between the risks to buyer and seller, respectively. These thresholds and limitations usually include:

  • Time limits in which a buyer can take action.

  • A cap on total liability.

  • A minimum claim amount.

These are not the only issues to consider when buying or selling a business, and not all will be of the same importance. Depending on your circumstances, some may also move into the background as you and your advisors negotiate the transaction.

Authors: Jason Sprague, Eric Kwan and Lucinda Borg