Legal basics for start-ups: What to do when you want to sell

StartupSmart has been running a five-part series to help plug any potentially disastrous knowledge gaps that new entrepreneurs may have regarding legal issues.

Lachlan McKnight, CEO of LegalVision, has already covered off legal structures, lurking online pitfalls ,the key documents you need to know, and the pros and cons of hiring an employee versus hiring a contractor.

In McKnight’s final piece, he outlines the legalities of selling your business.

You’ve built up your business, now it’s time to sell it. It’s important to remember that your entrepreneurial journey isn’t over until you’ve actually sold your business.

The process can be daunting and stressful, particularly for a founder who feels a real connection to the business.

Before selling a business, there are a number of legal issues that need to be considered by the seller.

Six of the more important issues are set out below.

1. What is to be sold or transferred?

The first issue for a seller to consider is what is to be sold? Depending on the type of business and circumstances of the seller, the sale may include:

• the property from which the business is operated, or if the seller does not own the property then the sale may be contingent on a transfer of lease;
• shares in the company, or units in the unit trust, that operates the business;
• the business name;
• contact details (e.g. telephone and fax numbers, email addresses, website);
• client or customer lists;
• plant and equipment;
• the debts of the business (debtors); and
• anything else necessary to operate the business.

2. What is the price? How is it to be apportioned?

The price of the business, and how it is to be apportioned, will largely be determined by the type of business and the parts of the business to be included in the sale (as set out above).

Any part of the purchase price that is not attributable to plant and equipment or debtors may be attributable to goodwill. The tax consequences of the sale will differ depending on how the purchase price is apportioned (as explained in point 6).

3. Will a restraint be imposed on the seller?

The buyer may wish to impose a restraint on the seller to prevent the seller from opening a similar or competing business to the buyer after the sale is completed. Restraints are generally limited to a specified period of time (e.g. six months) and a specified distance from the place where the business that is sold is operated (e.g. five kilometres).

4. Will there be a training period?

The buyer may wish to have the seller train the buyer in operating the business before and/or after completion of the sale of the business.

Training periods vary depending on the type of business, but training periods of seven days to 28 days are common.

5. Will any employees continue to be employed by the buyer after completion of the sale?

Generally, the law and terms and conditions of the agreement between the buyer and seller require the buyer to make an offer before completion of the sale to any employees of the business who the buyer wishes to continue to employ after completion of the sale.

The employment of any employees to whom an offer is not made by the buyer must be terminated by the seller on completion and their entitlements paid out.

The employment of any employees to whom an offer is made by the buyer continues and an adjustment to the purchase price is made on completion between the buyer and seller in respect of any employee entitlements.

6. What are the tax consequences of the sale?

There are a number of opportunities for tax planning by a seller in selling a business. Depending on the circumstances and how the sale is structured:

• GST may either apply or not apply, which impacts the purchase price by 10% (being the applicable rate of GST);
• capital gains tax (CGT) may apply in full, CGT concessions may be available, or the sale may be exempt from CGT. Depending on the marginal rate of tax of the seller, the tax rate that could apply to the sale of the business could vary between 0% and 46.5%.

Next steps

The seller of a business should seek legal and accounting/tax advice in order to maximise the after tax sale price of the business.

Similarly, a buyer of a business may need to seek advice in order to ensure that their purchase of the business is structured in the most tax effective way, bearing in mind that one day they will sell the business.