Stage 1 – Precontractual
The first stage is to reach an actual agreement. This might be recorded in heads of agreement or parties might simply reach an agreement in which case they should promptly proceed to execute a contract.
Essential items, typically, include:
Purchase price
Stock
Deposit
List of inclusions (e.g. plant and equipment, stock, assets, logos, trademarks etc)
Restraint of Trade
Any conditional clauses (e.g. due diligence or finance approval).
A Section 52 Statement will also need to be prepared if the business is valued at $450,000 or less. It is usual for the vendor’s accountant to prepare this.
During this stage, the Purchaser is likely to undertake their due diligence. Due diligence is an essential step in ascertaining all important information about the business prior to purchasing. It is critical for a purchaser to assess the value of the business and any potential risks associated with it.
The due diligence process involves investigating all aspects of the business including its day-to-day operations, financial performance, legal compliance, intellectual property, assets, and other-like details. It goes without saying that any purchaser should undertake a thorough due diligence process before entering a binding contract. As such, the due diligence process usually occurs prior to a binding contract being executed. However, contracts can also be signed conditional on the purchaser completing and being satisfied with their due diligence enquiries.
A vendor would, typically, provide a purchaser with:
Financial information;
Contractual and lease documents;
Information concerning employee entitlements (if employees are maintaining employment and with the employee’s consent); and
Aggregated statistical customer information.
Stage 2 – Contract
The second stage is contract preparation. A solicitor should be engaged to prepare and negotiate the contract (although most key terms should, ideally, have already been agreed). These negotiations will be done between the vendor’s and purchaser’s solicitors.
Any conditions that the contract is subject to need to be completed. These can include:
Finance;
Due diligence;
Minimum takings in a trial period;
Approval for transfer of lease; and
Granting of licences or permits such as, for example, liquor, aged care, EPA, pharmacies and post office.
Stage 3 – Unconditional Contract
Once all conditions in the contract have been satisfied, the matter can proceed unconditionally to settlement.
The vendor has obligations to the purchaser through to settlement. One of the major obligations of a vendor is to ensure that the business continues to run smoothly up until settlement occurs. Future business orders need to be taken and customers should be serviced correctly right up until settlement. The vendor should not enter into any major agreements or make significant changes without consulting the purchaser and the purchaser must also be advised of any important issues that arise.
All assets must also be in operational order and it is the vendor’s obligation to maintain them or reinstate them if, prior to settlement, they fail.
Stage 4 – Settlement
Settlement will take place once, inter alia, the following events have occurred:
Transfer of Lease / New Lease has been duly executed;
PPS Registrations relating to the business being sold are discharged;
Pre-settlement assistance period has been completed; and
Settlement monies have been paid.
The vendor may be required to provide pre-settlement assistance (such as training or introductions).
The settlement will occur once all documents and funds have been transferred to the other party.
Stage 5 – Post-Settlement
Post-settlement, the vendor may be subject to an assistance period, whereby they assist the Purchaser to integrate into the business smoothly.
Additionally, the Vendor must adhere to any non-competition requirements and uphold warranties made under the Contract of Sale for the time periods specified in the Contract.
ASAP Lawyers regularly accept instructions in the purchase and sale of businesses. Contact us on 03 9450 9400 to speak with one of our lawyers.
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