If you have ever sold a house or been to an open home, you will appreciate the importance of the house being made sale-ready. That usually means tidying up the garden, washing the windows, reducing clutter and attending to some of those matters of deferred maintenance. Essentially, it is about making the house as inviting as possible to a prospective purchaser and presenting the house in a way that enables the purchaser to see it as their new home. The same rules apply when selling a business.
This article sets out some of the things that you as a vendor can do to help make your business more attractive to prospective purchasers. If done well, these steps will also help for a smoother and more economical sale process.
Due diligence and non-disclosure
More often than not, the agreement for the sale and purchase of a business will be the standard Auckland District Law Society form. The terms of the agreement will give the purchaser an agreed period of time in which to drill into the particulars of the business before they become unconditionally committed to the purchase. You will need to provide due diligence materials to help the purchaser assess the business and satisfy itself that the business is worth the purchase price.
If the due diligence materials are going to include commercially sensitive information you might think about requiring the purchaser to sign a confidentiality or non-disclosure agreement before you hand the materials over. This would need to be included as a term of the sale and purchase agreement – it cannot just be imposed on the purchaser unilaterally.
Usually, purchasers will expect to see the previous three years’ financial statements. Depending on the nature of the business most purchasers will also ask for monthly management reports and GST returns up to the date of disclosure so that they have as full as picture as possible of the business’s financial trends and profitability.
If the business has not performed well recently, be realistic in what you hope to sell the business for. If you are selling through a broker and they have given you a valuation figure, consider getting a second opinion from you own accountant. If there is a substantial difference between the two then you can start thinking about how you might respond if the purchaser seeks to renegotiate the price when they have completed their due diligence.
Personal Property Securities Register
The PPSR is a central database of security interest in non-land assets. In a business sale context, the PPSR will record equipment leases, equipment finance, and security for bank loans. Even if the money owed on an asset has been repaid, it might still be showing on the PPSR.
You should obtain a search of the register and clear off any redundant financing statements. In most cases, all remaining security interests will need to be released by the secured party on or before the business sale settles. You should contact those secured parties to find out what their requirements are so that settling with them can be worked into the preparations for settlement.
Be prepared to clear out or write off the value of anything that is obsolete or unlikely to be relevant to the business in the future.
You and the purchaser will carry out a joint stocktake just before the settlement date, but it will be helpful if your stock records are up to date at all times.
The asset list is a list of items that the purchaser is buying from you. The list should not include any items that are hired or belong to the landlord and provided under the lease. If you do not own them then you cannot sell them. Misdescribing a hired chattel as one that is being sold with the business could give rise to a claim for compensation from the purchaser. Make sure that this list is up to date and that all descriptions are clear so that the purchaser can identify the assets easily on site.
Your due diligence bundle should include a list and copies of all supply contracts that the business relies on to trade. The purchaser will scrutinise these contracts because, in most cases, they will be essential to the running of the business and the value that the purchaser is paying for it.
Equipment hire agreements should be included as supply contracts.
If you are a member of a buying group or sell products under licence (for example, a Lotto outlet) then these should also be included in the list.
You could go one step further by identifying the contracts that can be assigned to the purchaser as of right. If you do not, you may need to obtain the other party’s consent to the purchaser taking the contract over, or the purchaser may need to negotiate their own contract.
Because your staff are employed by you, their employment will be terminated on settlement of the sale of the business. In most cases the purchaser will want to offer your staff their jobs back but under new employment agreements with the purchaser as the employer.
In a tight labour market, you should co-ordinate the purchaser making new employment offers to the staff members with you announcing to them that the business has been sold. You may have obligations to endeavour to secure ongoing employment for your staff, but in most cases the purchaser is not required to take on all employees.
You should be careful about what employment records you disclose to the purchaser. For example, although it might be helpful to the purchaser in deciding whether to make an offer of employment, providing details of any disciplinary or performance management steps may prejudice the employee and be a breach of your obligations to your employee.
If your employees are on a variety of different forms of contract and it is not practicable to standardise them, then take the time to compile a spreadsheet that sets out the key terms (including any special leave entitlements) of each employee’s employment in the business. This will enable the purchaser to see at a glance what each employee is likely to expect in their new employment agreement. However, before doing this you should check that each of the employment agreements permits you to disclose that information without the employee’s consent.
Because you will terminate each employee’s employment you will have to pay out any accrued leave entitlements under their employment agreement. Depending on the state of the labour market, the purchaser may agree to carry over some sick leave and long service entitlements (if applicable). The purchaser should also be open to being flexible for staff who have booked leave for dates after the settlement date, even if it is to be taken as unpaid leave on the basis that you will have paid the employee out on settlement.
Make sure that all of the lease documents are included in the due diligence materials. This includes the original Deed of Lease as well as all deeds recording renewals, variations and rent reviews. You might consider having your lawyers quickly review the bundle of lease documents for completeness.
Unless your lease has expired and is running on as a month-to-month lease (in which case the purchaser may wish to negotiate a new lease as a condition of the agreement for sale and purchase) your lease will be assigned to the purchaser on settlement. That will be recorded in a Deed of Assignment of Lease, which the purchaser’s lawyers will prepare and give to your lawyer for you to sign. The signed deed will be handed over to the purchaser on settlement.
The landlord will also sign the Deed of Assignment of Lease as a way of giving their consent to the assignment. You should be prepared to pay the landlord’s legal costs associated with considering your request to assign the lease to the purchaser.
If you have previously given a personal guarantee on the lease then you might ask the landlord whether they would consider releasing you from that guarantee early. In the absence of anything else, you will continue to be liable under your guarantee until the lease is next renewed.
As a concluding comment, it is important to bring the right mindset to selling a business. Regardless of your reasons for selling, the process can become an emotional one, especially if you have built the business from ground up and have poured your heart and soul into it. The ultimate purchaser might not share your attachment to certain parts of the business and may well not see the same value as you do in them. That could extend to processes, operating methods, stock lines, branding and even employees. Try to be dispassionate and respect the fact that the purchaser will be paying good money and that they have the right to conduct the business their way once the sale has been completed.