By Dawn Carey

The decision to acquire a business involves significant expenditure and risk, so it is imperative that the process and documentation are carefully considered. Source Legal’s Dawn Carey outlines key considerations for those wishing to enter into business sale agreements.

Structure of deal – shares v assets: One of the first matters to determine is whether the deal will involve the purchase of shares or the purchase of assets. There are distinct advantages and disadvantages to each structure, including:

  • A sale of shares is generally logistically simpler than a sale of assets, as a sale of assets will require the agreement to deal with each class of assets and liabilities. For example, in an asset sale, third party consents may be required for the assignment or novation of commercial contracts and the business’ employees will need to enter into new employment contracts with the purchaser.
  • A share sale is generally seen as more risky than an asset sale as a purchaser of shares will acquire the company (including the company’s assets and liabilities), whereas an asset sale will allow the purchaser to acquire specific assets and discard liabilities they don’t wish to acquire.
  • Transfer duty (tax): Transfer duty is generally not payable on the purchase of shares in a proprietary company, unless the selling company is registered in NSW or SA or is a landholder or land rich. However, most jurisdictions charge transfer duty on the sale of business assets.

Preliminary Agreements: Prior to a sale agreement, the parties may enter into preliminary agreements (such as Memorandum of Understanding, Heads of Agreement, Terms Sheet or Letter of Intent) that set out the key commercial terms of the sale agreement and procedures and protocols for the transaction, such as due diligence rights, transaction schedule and restrictions on the right to negotiate with third parties.  If the transaction is straightforward, time and resources will generally be better invested negotiating the sale agreement and not proceeding with a preliminary agreement.

A party should obtain legal advice prior to entering any preliminary agreement, as preliminary agreements can be binding and any deficiencies will cause problems for the rest of the transaction. If not carefully drafted, a supposedly binding preliminary agreement may not be binding when you want it to be or vice-a-versa.

Non-Disclosure Agreements: NDAs or Confidentiality Deeds are often entered into in the early stages of a transaction to protect sensitive information exchanged between the parties. A party should seek legal advice before entering into a Confidentiality Deed to ensure that scope of the document adequately protects its interests or objectives.

Due Diligence: Legal due diligence usually involves reviewing information provided by the target business (such as commercial contracts) and conducting searches of publicly available information to assess risks or problems involved in purchasing the particular business. The results of the due diligence investigations may have a bearing on the purchase price and the terms of the sale agreement, such as warranties and indemnities.

Key clauses in sale agreements which require careful consideration include:

Purchase price and adjustments: The purchase price for the business will be determined by reference not only to the value of the shares or assets, but also the other terms and conditions of the sale agreement, such as warranties. Parties will need to consider whether the purchase price will be fixed or whether a formula will be inserted to adjust the purchase price for changes in matters such as net assets and working capital. The purchase price may also be structured to include a deposit on signing, retention amounts (an amount of the purchase price retained for post-completion adjustments or as security for warranty or indemnity claims) or earn-out payments (additional payment linked to the performance of the business post-completion).

Conditions precedent: Consideration should be given to whether completion of the sale agreement needs to be conditional on certain conditions being met. The more conditions, the greater the uncertainty of the transaction completing. Common conditions precedent include obtaining approval from regulatory bodies like the Foreign Investment Review Board or the ACCC and obtaining consents from counterparties to commercial contracts.

Warranties and indemnities: Warranties should be included in the sale agreement to protect a purchaser against unknown liabilities.  Indemnities should also be included to protect a purchaser against known liabilities.. Purchasers need to be particularly mindful of proposals to cap the extent of the seller’s liability and time limits on claims.

Non-compete: To protect its investment, the purchaser should consider whether it requires a non-compete clause to prevent the seller from engaging in activities such as establishing a similar business (within a defined area and time) and from soliciting customers or enticing away employees during the restraint period. Non-compete clauses need to be carefully drafted to minimise the risk that they are not struck down by a court as being too wide or uncertain and thus invalid.

If you need assistance with a business sale, Source Legal has extensive experience in drafting Sale Agreements, Preliminary Agreements, NDAs, Confidentiality Deeds, conducting legal due diligence processes and guiding sellers and purchasers through the sale process.

By | Published On: 28th June, 2017 | Categories: Other legal services, Guides |