Have You Done Your Seller’s Due Diligence?
Selling a business is a complex process and requires many boxes to be checked to ensure a smooth transition from one owner to another. The first and often overlooked stage is seller’s due diligence.
The purpose of seller’s due diligence is for the seller and their advisors to investigate the business, its assets and business relationships to make sure all issues, including some that may not have even been thought of, are ironed out before the business goes on market.
A buyer will almost certainly carry out a thorough due diligence of a business before they commit to buy it, usually during a due diligence period under contract, and you can guarantee that if there is a problem, their advisers will find it. Each issue with the business that is discovered will erode the buyer’s perception of the value of the business and doubt will start to creep in.
If you are considering selling your business in the near future we recommend reviewing and checking off the following legal factors:
Is Your Business Name Registered?
Although this step may seem like a no brainer it is crucial to check your business name is registered and that it is registered to the current legal owner of the business. If you have your Certificate of Business Name Registration this will not be an issue. If however you are unable to locate your certificate you can easily check on the ASIC Connect site.
Once you have searched your business name you will be able to check:
who owns the business name;
the company’s ACN (if owner by a company);
if it is currently registered; and
the registration renewal date.
If any of these details are not what you believe they should be, they will need to be rectified before you list your business for sale.
Are The ASIC Details Correct?
Another item to consider are the ASIC details of the company. To find out these details, you will require a Company search of your business. You are able to purchase a current company extract from ASIC Connect. The search will show you who the ABN is registered to.
By checking who the ABN is registered to you will also be able to see the directors of the business. You will need to consider if there are any directors listed who may not agree to provide personal guarantee to transfer the business. If you think there may be issues we recommend you engage a solicitor to advise you regarding removing their name(s) from the company register etc.
Like our business name, you will also need to check the ABN registration is current and that the business is listed for GST. If it is not, you may need to do so prior to putting your business on the market.
You will also need to know your ASIC Login details. This is important as you will need to be able to login to transfer the business name to the new owner at settlement.
What PPSR Charges Are Registered Against Your Business?
It is important to check the Personal Property Security Register (PPSR) for any third party interests that may be lodged against your business. A prudent search would include a search of your ACN, ABN and business name. Some of these charges you may not be aware of, or may be outdated and will need to be removed prior to the sale of your business.
It is vital to conduct and check the PPSR search as it may show items that will deter potential buyers. A long list will be off-putting to many buyers as it may lead them to think that a business is run on credit.
If obsolete security interests are registered against the business, for example in favour of a previous supplier, you or your solicitor will need to obtain releases.
Have You Got A List Of Plant And Equipment?
Prior to putting your business on the market you will need to compile a list of all of the business assets. The list will need to include all plant and equipment, furniture and fittings that will be handed over to the buyer at settlement. You should also consider preparing a separate list clearly identifying anything that is specially excluded from the sale, e.g. the owner’s motor vehicle(s) or pieces of art work located at the premises.
If any of your businesses equipment is rented or leased, and the buyer wishes to take over the lease or rental agreement, you will need to contact the owner and arrange for transfer at settlement. The buyer will need to review the equipment lease or hire agreement and a deed of novation may be required.
You must consider all of these things early on in the piece and be open and honest as it may also affect the value of your business.
Is Your Lease Ready To Be Transferred?
To sell your business you will need to provide the buyer with a current, valid registered lease. Along with a copy of the registered lease you will need copies of current invoice for rent and outgoings such as utilities.
If your premises are retail premises you will also need to provide various disclosure statements.
You need to review your lease and determine the transfer or assignment of lease requirements and the length of the term left to run (including any available further terms). If the lease term is too short this should be addressed.
You may also need to consider whether your landlord will be willing to consent to a transfer the existing lease to the buyer. If they are not you will need consent from them to prepare a new lease. If this is required, a commercial lawyer will be able to assist you in the preparation of a new lease.
If on the other hand your landlord is willing to transfer the lease, a deed of consent to assign will be required. This will allow for a smooth transition of the lease from your name to the buyers.
Another item you will need to discuss with your landlord is the transfer and release from all obligations under the lease and any personal guarantees you have provided.
Overall, this checklist provides a broad overview of some of the main things you need to consider from a Legal Due Diligence perspective before putting your business on the market. We recommend discussing this with your broker and consulting a solicitor as this list is not extensive and requires experience in business sales.
There are other things that can be reviewed in a more in depth Seller’s Legal Due Diligence, depending on the nature of the business, for example:
the current employment contracts;
arrangements in place with suppliers;
client agreements; and
licences and permits required to operate the business.
As well as looking as the legal aspects you will also need to engage with your accountant to review the financial aspects of the business.
Please contact our Commercial Legal Team if you would like assistance with buying or selling a business or with any other commercial legal issue.
You may also be interested to read our article on Tips to Avoid the Main Issues that Can Derail a Business Sale.