Selling your business? Key considerations for a successful transaction

Every transaction has its own unique considerations, often influenced by the goals of the transacting parties, the industry to which the transaction relates and, critically, the structure and readiness of the business, entity or group which is at the centre of the proposed deal. Despite this, the importance of pre-transaction due diligence (sometimes known as ‘vendor due diligence’) is often overlooked when preparing for a sale event.  

If you want to sell your business, obtaining early stage legal advice is a prudent step on the path to a successful sale process – even a simple business ‘health check’ will help to avoid some of the common pitfalls experienced during the sale process. Engaging professional advisers (including lawyers and accountants) only when you receive the first draft of the sale agreement for review means that your adviser is then playing ‘catch up’ to understand the structure, processes and nature of the business, entity or group while simultaneously trying to effectively and efficiently negotiate the terms of the sale. Not ideal.  

When selling a business it is vital to:  

• Identify: take the time to identify and understand exactly what is intended to be sold. Is it your entire business, or only one division? What are the key assets forming part of the transaction? This will allow you to consider the parameters of the proposed sale event and the steps required to progress the sale;  
• Understand: consider the steps that will need to be overcome to effect the sale and avoid potential for delays arising from matters you can control; 
• Prepare: prepare and collate all information relevant to the proposed sale to identify any potential shortcomings that need to be addressed and to ensure that negotiations (and buyer due diligence) can be progressed efficiently; and  
• Document: once a buyer has been identified, document the key terms and deal framework early to solidify deal parameters and to ensure party expectations are clearly stated, ensuring that the parties are aligned on the path going forward.  

The various matters for consideration within each of these stages are set out in further detail below.  

IDENTIFY 

What is your existing corporate structure?  

The operating structure of your business, including how assets of the business are held and who is responsible for conduct of the business, is critical to determining the key features of a transaction. It is important that the existing structure is accurately identified from the outset to avoid any potential complications and/or unnecessary delays.  

Some examples of common structures include:  

• companies, both public and private; 
• general partnerships (with or without a corporate manager);  
• joint ventures (both incorporated and unincorporated); and  
• trusts, where a trustee (company or individual) conducts the business on behalf of the trust. Trusts are commonly fixed unit trusts or discretionary trusts, but could also be a hybrid trust structure. 

What is being sold?  

It is important that you identify exactly what you are proposing to sell in the transaction, for example:  

• specific assets used in connection with the conduct of your business especially any real property, which will require careful consideration from a tax perspective;  
• your business as a whole, including all of the assets required to conduct that business; or 
• shares in the company that operates your business (or, in the case of a trust, shares in the trustee entity which conducts your business and/or units in the trust for which the trustee conducts your business).  

Who are you selling to?  

If you are dealing directly with a specific buyer (or multiple interested parties) you should confirm the identity of each relevant party to assist in determining:  

• any regulatory issues that could arise, including obtaining approvals:  
• under the new mandatory merger clearance regime;  
• where the transaction may trigger Australia’s foreign investment laws; and/or 
• for the transfer of any licence, approval or authority used in connection with the business; and  
• any potential competition issues that could arise as a result of the proposed transaction (for example, would the transaction result in competition being substantially lessened?).  

UNDERSTAND  

What steps need to be taken to achieve the desired outcome? 

Prior to undertaking any sale event, you should take the time to review (or get advice in relation to) your constituent documents (which, depending on your structure, may include a constitution, shareholders’ agreement, unitholders’ agreement, partnership agreement, joint venture agreement and/or trust deed) and specifically, what (if any) obligations must be complied with. By way of example, the constituent documents may specify minimum thresholds for member / board approval to approve any proposed transaction.  

This process can be time consuming, especially when all members (or, in the case of other structures, equityholders) are not aligned on the desired outcome, and it is important that you prioritise compliance to avoid any potential disputes arising. 

What other approvals are required?  

You may also be required to seek and obtain approvals / consents from third parties, including:  

• counterparty consents (for example, to a change in control or assignment/novation of a contract); 
• consents from any third party financiers; and 
• the release of any security arrangements (for example, security interests registered on the PPSR against certain assets).  

In certain circumstances, steps may also need to be taken to provide substitute security (for example guarantees in connection with a lease agreement) and it is important that these are identified, and steps are taken to engage with the relevant counterparty, as early as possible to ensure that expectations are clearly understood and that any requirements can be discussed with the buyer.   

PREPARE  

Are your company records in order? 

It is prudent to conduct a ‘health check’ of your business prior to starting any sale process to ensure that your books and records are accurate, complete and up to date. This health check will ensure, for example, that your contracting practices are complete and legally binding, that all officers have been correctly appointed, all securities validly allotted and issued and that key important decisions have been documented as required. This allows any corporate governance issues to be cleaned up prior to potential buyers undertaking their due diligence and raising the issues when there is a tighter timeframe and more pressure to get everything in order.   

What should be included in your data room. 

It is important, prior to inviting potential buyers to undertake due diligence, that you set up a clearly organised and complete data room. This includes ensuring that there are copies of: 

• the latest version of each contract; 
• all officer consents;  
• all share allocation and transfer documents; 
• all constituent documents such as constitutions, shareholders’ agreements, trust deeds, partnership agreements, joint venture agreements, unitholder agreements etc. and any variations or other amendments to these documents (if relevant); 
• all signed board and equityholder / shareholder minutes/resolutions;  
• employment contracts (if relevant) and any equity schemes / employment incentives such as employee share option plans; 
• an up to date members’ register and officers’ register; 
• up to date asset registers;  
• accurate lists of key customers/suppliers; and  
• copies of any key restructuring and/or acquisition documents.  

Undertaking a health check prior to starting the sale process can assist in getting your books in order for the purposes of this data room. It also helps to ensure that the folders in the data room are clearly organised, and that there is a system for the naming and uploading of documents. Failure to do this can result in a lot of wasted time, as buyers ask further follow up questions via the request for information (RFI) process. It can also result in an administrative headache at a time when you are simultaneously focused on running your business whilst in the process of selling it.  

Who will be responsible for liaising with prospective buyers? 

When different vendor representatives are giving buyers inconsistent information, it can create buyer mistrust and hesitation. Everyone representing and answering your questions on your behalf should be across all areas of the business and have familiarised themselves with the issues so that they can provide correct and complete answers, and the main points of contact should be limited where possible.  

DOCUMENT 

A Term Sheet, Heads of Agreement or Memorandum of Understanding can be a useful and practical way for parties to openly discuss and agree on a framework for the transaction, including any key terms that the parties intend to include in the sale documentation. This could include items such as the structure for the calculation and payment of the purchase price (including any earn-outs or performance based escalators), any conditions precedent to completion and any other general rights and obligations upon which the parties have agreed.  

Such a document may also be drafted to reflect the intentions of the parties as to:  

• where the purchase price is to be calculated with reference to financial metrics (for example, EBITDA x an agree multiple) a clear understanding as to what line items are ‘in’ and ‘out’ for the purpose of calculating EBITDA;  
• the agreed where the purchase price include earn-outs or other performance based escalators, how these are to caculated 
• any exclusivity rights (including the duration of such rights);  
• the binding (or non-binding) intentions for the transaction;  
• which party will prepare the transaction documents; and  
• any conditions to progress to formal transaction documents.  

It is important that the document also include appropriate confidentiality obligations (which are binding on the parties) to ensure that any information shared in connection with negotiations is sufficiently protected. In certain circumstances (including where the information is highly sensitive, high-value and/or the parties operate in the same industry) it may be appropriate that the parties enter into a formal confidentiality deed (or similar) to address these obligations in greater detail, including the rights of the parties in respect of any breach.  

Too often we are presented with term sheets which fail to adequately address key transaction terms (whether contentious or otherwise), with a view to ‘pushing on’ with the deal and continuing to negotiate key terms during due diligence and the preparation of transaction documents, which can lead to inefficiencies and in some cases transactions grinding to a halt where parties are unable to align their expectations.  

CONCLUSION  

This is a high level summary of key issues that a vendor must consider when looking to sell their business. As always, the devil is in the detail, and seeking early stage advice (from your lawyer, accountant and other professional advisors) is an imperative first step on the sale pathway. 

Our Corporate & Commercial team has extensive M&A experience, working with SMEs through to significant family businesses and large listed and unlisted corporates in a wide range of industries. We also conduct legal business health checks prior to sale. Should you have any questions in relation to this article, or require assistance with a business sale or purchase, please don’t hesitate to reach out to a member of our team.  

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