Business Sale and Purchase Agreements

23 October 2024 in Business Law | 7 min read | skip to FAQs

A well drafted business sale and purchase agreement is essential when selling or purchasing a business. It outlines key terms and conditions that protect both the vendor and the purchaser, ensuring a mutual understanding of rights, obligations, and key timeframes. Without proper attention to these clauses, parties may be exposed to legal disputes, future business risks and uncertainty. Although no two business sales are identical, this article outlines key clauses commonly found in such agreements to protect both parties in an arm’s length transaction. BSM Sydney lawyers are legal experts in business sale and purchase agreements.

Key Terms in Business Sale and Purchase Agreements

Structure of the Sale

A business may be sold in two ways:

1. as an entire company by the transfer of 100% of the shares in the company from the vendor to the purchaser; or
2. as a transfer of the assets of the business from the company (or other entity) that owns the business to the company (or other entity) that will purchase the business.

A share sale will usually be used for more complex businesses. The choice of method requires careful consideration. The primary advantage of a share sale is that all contracts will remain with the company that owns the business, this includes employee contracts and customer contracts and is particularly important where long term contracts are in place. The primary disadvantage is that any contingent liability of the company will also transfer and the new owner may find that after the purchase the company is the subject of a legal claim.

Purchase Price

The agreed purchase price usually reflects the value of the business, which may be based on the assets of the business, or the net present value of the future income and potential for growth. The purchase price should reflect the valuation of the key assets being transferred, such as:

Goodwill

The intangible value attached to a business’s reputation (see Inland Revenue Commissioners v Muller & Co’s Margarine Ltd [1901] AC 217). Goodwill is related to the future income likely to be generated by the business.

Business Name

The vendor may be required to transfer the business name on the national business name register to the purchaser.

Stock in Trade

Stock in trade refers to goods that are available for sale and may serve as the primary source of income for the business. As a circulating asset, stock in trade is routinely sold and replenished in the regular course of business operations. It is essential for the purchaser to closely examine the stock-in-trade to assess its saleability and value to ensure that it aligns with the purchaser’s commercial expectations. The contract will often provide for an adjustment of the purchase price based on the value of stock.

Work in Progress

This typically applies to service based businesses, where work has been performed but has yet to be billed to a client. In some cases, work in progress forms part of the trading stock and is of a tangible nature.

Plant and Equipment

A full list of plant and equipment should be attached to the agreement (see Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601). Further, the vendor should disclose any registrations of any security interest over the plant pursuant to section 174 of the Personal Property Securities Act 2009 (Cth).

Intellectual Property

Intellectual property including trademarks, copyright and patents must be identified in the contract and transferred with the sale of the business. Other information, often of a confidential nature, may also be transferred with the sale of the business, this may include customer and supplier lists, websites, contact telephone numbers, procedure manuals and business practices.

Existing Contracts

Agreements with key customers and suppliers, employees and leases may need to be transferred with the business. If the sale is of the assets of the business such contracts must be assigned or novated to be transferred to the purchaser by a separate agreement. If the sale of the business is of the company entity by way of a transfer of shares the contracts will transfer with the company entity but may require review to ensure that there are no clauses such as “a change of control” that may result in the sale of the business being a breach of the contract.

Payment Terms

The contract should clearly outline the payment method, including details about deposits, instalments, and lump-sum payments. The standard deposit is typically 10% of the purchase price, demonstrating the purchaser’s commitment and may be invested to earn interest between the exchange and completion of the contract. Both parties must agree on these payment terms to avoid future misunderstandings.

Exchange of Contract

The vendor’s lawyer will usually prepare the contract for the sale and the contract will be reviewed by the purchaser’s lawyer and agreed upon after negotiation. The contract for the sale of the business will become binding upon exchange with completion (also called settlement) to occur at some future date, similar to transfer of real estate.

Contracts are often exchanged only after the purchaser completes due diligence. In the case of more complex business sales due diligence may be necessary and a separate due diligence agreement may be required. During the due diligence process the prospective purchaser will have access to the books and records of the business, key contracts and the premises. During this process the prospective purchaser can check and analyse any key risks including legal and financial risks. The due diligence agreement will generally include confidentiality clauses. If the sale does not proceed, the confidentiality clauses will oblige the purchaser to maintain the vendor’s business information in confidence. For more information on due diligence when purchasing a business, please see our dedicated article on this topic.

Completion Date

The contract will specify a completion date, typically following the exchange of contracts. If time is critical, it must be specified in the contract. However, when completion depends on external events (such as approvals from a lessor or a court), the completion date will be specified but time is usually not made essential. (Note: time being essential simply means that any delay will give rise to a right for the non-delaying party to terminate the contract.)

Debts and Liabilities

The contract should clearly specify which party is responsible for the business’s outstanding liabilities and debts at the date of completion. It is essential for the purchaser to fully understand the business’s financial position before completing the transaction to avoid unexpected obligations and future liabilities as may arise for example in the case of gift vouchers.

Goods and Services Tax (GST)

It is essential to understand the Goods and Services Tax (GST) implications of the transaction and ensure the contract accurately reflects the appropriate tax treatment under the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act). Generally, GST is payable if the sale of the business property is considered a taxable supply under section 9-5 of the GST Act. However, sales of going concerns are typically GST free. The vendor must also be aware of the purchaser’s GST registration status at the time of sale, which is usually required for businesses with an annual turnover exceeding $75,000.00 (GST Act s23-15).

Restraint of Trade Clause

A non compete clause is typically included to prevent the seller from competing with the business post sale for a specified period within a certain geographical area, protecting the purchaser’s interests.

Dispute Resolution

The contract should include a dispute resolution clause, detailing the process for resolving any future disputes between the parties, potentially through mediation or arbitration, to avoid costly litigation.

Special Conditions in a Business Sale Contract

Standard contract conditions may not suit all transactions. In such cases, amendments or new clauses are often needed to reflect the specific agreement negotiated by the parties.

For example, when defining the scope and value of stock in trade in a business sale contract, the purchaser may discover that although the stock in trade is of good quality, it may be outdated, slow moving or out of fashion. In such instances, it may not be commercially sensible for the purchaser to pay full value for these items, particularly when there is little prospect of selling them quickly or recovering their full value on the open market. Therefore, a tailored special condition should be drafted to account for the specific circumstances related to the stock in trade of the business being sold, as well as to protect the purchaser from the vendor depleting the stock below a certain threshold before completion.

Warranties and Indemnities

Warranties

These are promises made by the seller regarding the condition of the business, such as its financial performance, legal compliance, operation prior to the date of completion and the status of assets. For example, ensuring that there are no encumbrances on the business assets helps guarantee a clear title transfer. The number and type of warranties will vary depending on the business’s risk profile. Warranties provide assurance to the purchaser that they are acquiring a business in good standing.

Conclusion

A well drafted sale and purchase agreement is essential for protecting both parties’ interests in a business transaction. It ensures clarity regarding rights, obligations and key terms. A contract that has been drafted and reviewed by an experienced business lawyer will minimise the risk of future disputes. While each sale is unique, it is crucial to understand the key clauses and tailor and negotiate the agreement to your specific commercial needs. Consulting with legal professionals will identify potential risks and assist in negotiating favourable terms.

How can BSM Sydney Lawyers assist you?

At BSM Sydney Lawyer our business lawyers have extensive experience in reviewing and drafting comprehensive business sale agreements. BSM Sydney lawyers have over 40 years of experience in business sale and purchase agreements. We have seen numerous cases where contracts failed to reflect the parties’ true intentions, leading to unenforceable terms and expensive legal disputes. You can avoid these unnecessary business complications by engaging an experienced commercial lawyer.

Whether you need a review of an existing contract or assistance drafting a new one, the experienced business lawyers in our law firm are here to assist. We ensure that your contract is fit for purpose, aligns with your commercial goals and that you fully understand your rights before entering into any business sale transaction. Contact Brander Smith McKnight Sydney Lawyer for a free 20-minute consultation with a senior business lawyer to discuss your needs.

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