Traps when Selling a Business

In this post, we identify the biggest, most stressful mistakes Sellers make when selling a Business.

1. Transferring the Lease – A major problem of Settling a Sale without a signed Lease in place is that the Seller remains liable under the Lease, including payment of rent and outgoings; and the Buyer may continue to operate the Business without tie-down to a Lease. This presents a dangerous situation for the Seller as the Buyer may no longer want to operate the Business at the premise, or at all, and the Seller is now potentially stuck with a Lease without a financially liquid Business. In the event that both parties agree to settle before the Lease is ready, savvy Sellers have been known to hold ransom over the Buyer by maintaining the EFTPOS facility, or some other asset, as a way to secure payment of rent and outgoings and ensure the Lease is signed.

2. Transfer of Business Accounts and Assets – At Settlement of a Sale, the Seller usually provides the Buyer with Account details or Transfer of Account details however relies on the Buyer to follow through with transferring the Accounts over to themselves. As a Seller it’s best that you sit down with the Buyer and ensure that all transfers are complete before walking away otherwise you may be liable for penalties, fines, and payment of bills for a Business you no longer own.
3. Securing Vendor Finance – a Seller’s relationship with a Buyer often breaks down after Settlement so ensuring satisfaction of Vendor Finance as quickly as possible is important. Obviously looking to secure Vendor Finance against Assets is commonly practised but suing a Buyer can take 12 months or more and can cost upwards of $40,000 in legal fees. Agree on short term remedies in the Sale Contract to hold a buyer ransom and avoid taking the matter to Court.
4. Securing Due Diligence – Buyers often blame the Seller for poor trading performance after operating the Business for a number of weeks or months. Once a Buyer takes over the Business it is no longer in the Seller’s control so, Seller’s should make sure that the Buyer provides written confirmation that they have completed their Due Diligence investigations and are satisfied in every respect prior to Settlement of the Sale. To avoid recourse, Seller’s should also allow the Buyer to satisfy themselves prior to Settlement investigation of other matters such as: (a) plant and equipment; (b) necessary licences, permits, certificates and consents to operate the business; (c) staff entitlements; and (d) financial records.
5. Securing Confidentiality and Non-Compete – in the event the Contract of Sale does not Settle, the Sale Contract should have a strong Confidentiality Agreement and Non-Compete clause to prevent the Buyer and specifically the Director/s, Shareholders, and Unit Holders etc. of the Buying Company from using the Confidential Information and/or establishing Competition within a certain period and radius from the Business. This should also include soliciting staff, clients and suppliers of the business. Penalties should apply where a breach occurs. Without a written agreement in place, you won’t have any recourse.

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DISCLAIMER
The information contained in this post is an opinion based on past experience. Do not take this as financial or legal advice.