Thinking of Buying a Business FINAL - Aspect Legal · 2020. 3. 8. · 2 THINKING OF BUYING A BUSINESS? A Buyer’s Guide to Closing the Deal This guide gives an overview of the main

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THINKING OF BUYING A BUSINESS?A Buyer’s Guide to Closing the Deal

www.aspectlegal.com.au

A BUYER’SGUIDE TOCLOSINGTHE DEAL

Thinking of Buying a Business?

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This guide gives an overview of the main steps involved in a business purchase transaction, the important issues you should consider and hints and tips to help you along the way. In our combined 25+ years of practice in this area, we have often seen deals unnecessarily fall down after months, sometimes years, of time and effort simply because the parties were unprepared or unfamiliar with the process.

Nothing can replace the advice and assistance of a professional adviser, but being yourself prepared will reduce your stress levels, reduce your costs and even make the process enjoyable – as it should be!

Be prepared and get the best deal possible!

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Summary of the Transaction Flow / 4Step 1: Understanding your Motives / 5Step 2: Understanding the Business / 6Step 3: Value the Business / 8Step 4: Make an Offer / 9 Step 5: Negotiate with the Seller / 10Step 6: Structure the Transaction / 11Step 7: Prepare the Purchase Documents / 12Step 8: Buy the Business! / 13Step 9: Post-purchase Considerations / 14 Business Buyer’s Checklist / 15 Where do I begin? / 16Specialist business sale and acquisition services / 17

CONTENTS

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SUMMARY OF THE TRANSACTION FLOWThis is an overview of the steps involved in a business purchase transaction. Every deal is different and may not proceed in the order set out below or some steps may occur simultaneously and repeatedly (e.g. the due diligence often continues up until the legal documents are signed). Your adviser will guide you through the necessary steps and help you determine a transaction timeline from the outset.

UNDERSTANDING YOUR MOTIVES

WHY DO YOU WANT TO BUY?

EXITSTRATEGY?

YOURCONTRIBUTIONS

UNDERSTANDINGTHE BUSINESS

EXCLUSIVITY

WHAT DOESTHE BUSINESS DO?

RISKS?

CONFIDENTIALITYAGREEMENT

WHY ARETHEY SELLING?

VALUE THE BUSINESS

EMPLOYEES

TAX

ACCOUNTS

ASSETS

MAKE AN OFFER

PREPARE SALE DOCSNEGOTIATE

STRUCTURE THETRANSACTION

BUY THEBUSINESS

POST-PURCHASE

CONSIDERATIONS

LEVERAGE?

WARRANTIESINDEMNITIES

PAYMENTSTRUCTURE

NOTIFICATIONS

SHARE SALE?

APPROVALS

ASSET SALE?

SALE & PURCHASE

AGREEMENT

NOTIFICATIONS

OTHER CONTRACTUAL OBLIGATIONS

PAY PURCHASE

PRICE

SIGN DOCS

LICENSES /

PERMITS

Steps where a lawyer can

assist

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STEP 1: UNDERSTANDING YOUR MOTIVES

Speak to someone who has worked in a similar business – has their experience reflected what you think it will be like?

Aspect TIP

Speak to an experienced adviser as early as possible. A

good adviser will ask you the hard questions and refer you to other

professionals to assist you

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This is perhaps one of the most important questions to ask yourself, and is often not given enough importance by prospective Buyers. Be honest with yourself, and be realistic. Your answers will help you determine the value of the business to you. Some possible reasons for buying a business are:

A lifestyle choice – to be your own boss and work your own hoursLiving your passion Making money for an early retirementExpanding an existing business

Understanding what it is you are expecting to receive out the business will also help focus your advisers when they assist you with undertaking due diligence of the business.

2. What will your exit strategy be?

It may seem like a strange question to ask when you haven’t even purchased the business yet, but having a vision for the end goal will help you establish milestones and determine which of the business’s assets are of value to you. Some exit options may be:

Sell some of its assets and build up the remaining part of the business

Building up the business to sell it to a competitor and remain on management

Build up the business and list it on the stock exchange

Create a family business to pass on to your children

Create a franchise

1. Why do you want to buy the business?

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STEP 2: UNDERSTANDING THE BUSINESS

Ask a lawyer to review the

confidentiality agreement to ensure you are not

inappropriately restrained

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Commonly referred to as “due diligence”, this step involves thorough information finding about the business. This will help you determine whether this is a business that you want to buy and whether you will get what you think you are buying.

At this stage, the Seller may ask you to sign a confidentiality agreement before handing over any information about the business.

3. Why does the Seller want to sell the business?

Understanding the reasons why the Seller is selling the business can give you an insight into the position of the business and help you to value the business. Reasons a Seller is selling include:

Retiring, moving, looking for a changeUnsuccessful in making the business workThey foresee challenges which they are not able or willing to face

4. What is the “business” of the business?

Understand what it is exactly that the business does and how it makes money. Things to consider:

What goods or services does it provide? Who are its customers? Who are its suppliers? Who are its employees? Where are its customers/suppliers based?What are its distribution channels?What geographical or physical limits are there on the

business?Is the business scaleable?

Understanding the Seller’s motives will

help you leverage your negotiations

Aspect TIP

Speak to your lawyer about securing

exclusivity arrangements with the Seller before you start delving into the buy

process

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5. What are the risks of the business?

All businesses have some risks. Understanding what these are will help you determine whether you are willing and able to make the business successful. The risks will affect its value and help you assess other costs and opportunities that may be available in the business. Areas to explore:

Are the assets worth more or less than your proposed asking price? How many customers does the business have and how concentrated are those customers? Who are the key employees? Will they stay on if you buy the business?How profitable has the business been in recent years? Will the necessary business contracts continue on a change of ownership? Are approvals from contract parties required before the purchase can be completed?What are the trading patterns over recent years? How strong is the industry in which the business operates? Are there any licenses or permits that the business requires to operate? Will you be able to automatically renew those licences or permits? Does the business own the assets it uses day-to-day?Are there any other regulatory or legal issues that will or may affect the business?

As part of the due diligence process, it will be important that various documents of the target business are properly reviewed. As a guide, below is an example of the types of documentation that should be reviewed in this phase:

Incorporation documents and shareholder agreementsBusiness accounts and tax returnsFinancing documents, security agreements and any other finance/credit related documents Copies of all contracts that the target business is a party to (this might include: contracts with employees, contractors, customers, suppliers and business partners; leases; contracts relating to IP, licensing or royalties etc)Intellectual property documentationCopies of permits, licences and other registrations required to operate the businessAny other legal document that is relevant to the target business

A thorough legal review of the business contracts

will identify risks

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STEP 3: VALUE THE BUSINESS

6. What is the value of the business?

Many things will contribute to the value of the business; and different assets and liabilities will be valued differently by and to different parties. This important step will determine an “objective” value for the business as well as a “subjective” value for the business – what it is worth to you. This will require considering what you intend to do with the business and what you can bring to the business. Things to consider:

Look at the business’s lodged tax returns and consider its cash flows, credit and debt levels Determine the financial status of the business. An accountant or business adviser will be able to help youUnderstand the legal status of the business (e.g. what assets does the business own? What assets does it rely on but does not own? Does it own or license any intellectual property? What are its contractual obligations? Employee obligations and retention? Outstanding disputes and litigation?)What is the value of the goodwill in the business?What will / can you do to make the business successful (reposition the product/services? Add new products/services?)

Depending upon your budget and the size of the purchase, it could be worthwhile engaging a professional valuer to help value the business. Professional valuers will have a better understanding of the business and the industry that it operates in and how to value it. The valuation may also give you some leverage in negotiating the price.

Consider what your strengths and

weaknesses are and what value you can add to the

business

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STEP 4: MAKE AN OFFER

7. Make an offer to the Seller

Based on the valuation of the business, make an offer to the Seller. This may take the form of an official written offer or preliminary discussions. In making the offer, some issues that you should consider:

Your projections for the businessHow will payment be structured? Lump sum? Deferred? A combination?How eager is the Seller to sell?What is your timing for completion of the transaction?What costs have you incurred to date in relation to the transaction (the longer the transaction is drawn out, the higher the chances that the costs will be higher).

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STEP 5: NEGOTIATE WITH THE SELLER

8. Negotiate with the Seller

You can usually expect the Seller to reject your initial offer, so be prepared with good reasons to justify your asking price. Consider the issues or things that you are willing to “give up” in order to accept a higher price. Issues to consider to assist you to negotiate your position:

Why is the Seller selling? What are market or industry conditions like or what will they be like in future?Are the financial and legal records in a good state?Are there any outstanding disputes?Are there any questionable or bad management practices that have impacted the business?

Issues that may need particular negotiation include:

Non-compete clausesWarranties and indemnities (which will vary depending on the structure of the transaction)Post-purchase assistance from the SellerPayment timelines and conditions.

A good lawyer will help you with strategic

negotiations to get you the best possible outcome

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STEP 6: STRUCTURE THE TRANSACTION

9. How will the purchase transaction be structured?

Designing the right structure for the transaction will ensure that you get the most value out of the purchase. Tax consequences and financing issues will shape the structure of the transaction. The important considerations here include:

Will this be a share or asset sale?What are the tax issues? Which assets can be depreciated?How will you finance the purchase? Cash? Loan? If borrowing funds, what security will be required?Will you pay the sale price in a lump sum or in instalments? Which legal entity will purchase the business?

A lawyer will help you determine the most appropriate

structure for you

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STEP 7: PREPARE THE PURCHASE DOCUMENTS

10. What legal documents will be required to effect the purchase?

This varies depending on the nature of the business, the industry it operates in and the structure of the transaction. The usual documents may include:

Sale and purchase agreementConfidentiality agreement (if not already in place)Financing documentsCorporate and regulatory approvalsStakeholder (e.g. banks, landlord, key suppliers) notifications and approvalsContract novations

The type and number of documents required will impact on the timing (and hence cost) of the overall transaction, so this should be factored into the price.

A lawyer will help negotiate appropriate

warranties and indemnities to ensure you are

appropriately protected

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STEP 8: BUY THE BUSINESS!

11. Sign all the relevant documents

Ensure that the right people sign the appropriate documents. The signatories to the sale documents will vary depending on whether the transaction has been structured as a share sale or asset sale. In some cases, you or the Seller may need corporate approvals before relevant people can sign the documents.

12. Complete and lodge any ancillary documents

Ensure that any ancillary documents (such as regulatory notifications, licenses and permits) are completed and lodged within required timeframes.

13. Pay the purchase price

This is one of the most important steps for the Seller, so make sure you pay on time and correctly! If payment is via bank transfer, ensure you have those details (it should have been included in the Sale and Purchase Agreement!). If payment is via cheque, ensure you have the names of the right entities to make the cheque out to.

Some notifications are subject to time limitations –

speak to your lawyer

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STEP 9: POST-PURCHASE CONSIDERATIONS

14. Are there any post-purchase obligations that need to be met by either party?

The meaty part of the transaction is completed, but there may be certain notifications and obligations that may need to be satisfied before the purchase is complete. Sometimes, the transaction may be subject to certain conditions precedent to finalising the transaction – in other words the transaction is not completed until these steps are completed. Failure to satisfy these conditions may result in an adjustment to the purchase price or, in the worst case, the deal falling through. The Sale and Purchase Agreement should have set out some of these.

Some common post-purchase obligations include:

Notifications to suppliers, landlord and banksRegulatory notifications or approvals (e.g. to ASIC)

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Pre-discovery protectionsSpeak to a lawyer about whether you should request exclusivity for a period during the due diligenceAsk a lawyer to review any confidentiality agreement the Seller asks you to signAppoint appropriate and experienced advisers to assist you through the process (accountant/financial adviser, lawyer, industry specialist)

Due DiligenceUnderstand what is being sold (which assets and liabilities, shares)Understand why the Seller is sellingUnderstand the financial position of the businessUnderstand the legal position of the businessConsider the reasons why you want to purchase the business and whether you need any contractual protections to ensure that you will receive what you think you will receive (which assets are vital to you?) What exclusions are deal breakers?Understand the risks in the business

Purchase structureInvestigate the different ways to structure the purchase Get an estimate of the tax implications of the different structuresConsider other implications of the alternative approaches (e.g. indemnities, warranties, ease of purchase etc)Consider the different options available for financing the transaction (e.g. bank loan, peer-to-peer loan, secured mortgage etc)Consider the alternative payment structures (e.g. cash, deferred payment etc)Understand your financial budgetary constraints and limits

TimelineDetermine the timeline for completing the transaction – build in a buffer!Understand the implications of a failure to meet certain milestones in the timeline

BUSINESS BUYER’S CHECKLIST

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aspect legal offers a number of services to help prospective business buyers.We start with a free initial consultation that provides an in-depth discussion of your plans, the legal steps involved in a purchase, the timeline for each step, and the other items you should be considering.

Our services for Buyers:

Advising on pre-purchase documentation (Confidentiality Agreements, Heads of Agreement etc)Undertaking due diligence of the target business Drafting and negotiating the sale document Undertaking transactional requirements of the saleFinalising the deal with a successful commercial outcome

Once you have started down the purchase path, we will work closely with any of your other appointed advisers and we provide checklists and regular updates throughout the process, to keep you fully informed about timelines, what we are doing, and what you need to be doing.

If you would like to get started with a free consultation or have any questions, click on the buttons below.

More information about aspect legal www.aspectlegal.com.au

POSTAL ADDRESS:PO Box 575 Brookvale, NSW 2100

PHONE NUMBER:02 8006 0830

OFFICE LOCATION:Top Floor, 6/10 Rodborough RoadFrenchs ForestNSW 2086

Contact us Information pack Free Consultation

WHERE DO I BEGIN?

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aspect legal’s specialist business sale and acquisition services

Aspect Legal is a boutique commercial legal firm servicing businesses ranging from small to medium enterprises all the way through to national and multi-national corporates. Our specialty is business sales and acquisitions.

The lead lawyers in our specialty business services team are Joanna Oakey, Director of Aspect Legal, and Senior Lawyer, My-Linh Dang. With over 25 years combined experience in business sales and acquisitions, Joanna and My-Linh have advised on an extensive range of smaller domestic transactions as well as larger multi-jurisdictional international transactions.

Both Joanna and My-Linh have entrepreneurial experience and have held directorships in a range of business industries including finance, accounting, IT, and web-based businesses. Their first-hand experience of the “inside” of businesses gives them a unique and commercial perspective of the challenges and opportunities of business owners.

As a boutique practice, you can be assured that throughout your transaction, you will always deal directly with Joanna and My-Linh.

Joanna Oakey

My-Linh Dang

Our key differences to other lawyers:

Experience and Quality Highly responsive services Extremely quick turn around times Commercial focus Team players We truly care