Key points
  • Confirm exactly what entity owns each asset being sold.
  • Review the premises lease before promising it can be transferred.
  • Prepare evidence supporting revenue, licences, intellectual property and key contracts.
  • Coordinate employee, GST and tax issues with the sale agreement.
  • Negotiate warranties and restraints deliberately; do not treat them as boilerplate.

1. Confirm what is actually being sold

A sale can be structured as an asset/business sale or as a sale of shares in the company that carries on the business. The legal and tax consequences differ significantly. In an asset sale, the contract should identify goodwill, business names, intellectual property, plant and equipment, stock, customer contracts, licences and other assets with enough precision that both parties know what transfers at completion.

Check ownership early. It is common for a trading company to use an asset owned by a director, related entity or trust. A buyer will usually expect the seller to prove that the contracting seller can transfer everything promised.

2. Clean up the due-diligence file

Before giving a buyer access to records, assemble the documents a sensible buyer will ask for: corporate extracts, financial statements, tax registrations, lease and variations, equipment finance, material customer and supplier contracts, employee information, licences, IP registrations, litigation and compliance material.

Inconsistencies between the marketing material, financial records and legal documents should be resolved before they become a warranty issue.

3. Review the premises lease

If the business depends on leased premises, the sale may depend on landlord consent to an assignment or the grant of a new lease. Review the assignment clause, remaining term, options, guarantees, permitted use, arrears and make-good obligations. For retail leases, statutory disclosure requirements can also apply to an assignment.

4. Decide how employees will be dealt with

A sale of business can involve transfer-of-business rules under the Fair Work Act. The parties need a clear position on offers of employment, recognition of service and adjustment or payment of entitlements. The contract should align with the proposed employment process rather than deal with employees as an afterthought.

5. Negotiate warranties by reference to evidence

Seller warranties can cover accounts, tax, contracts, employees, licences, assets, disputes, insolvency and compliance. They should be checked against the actual state of the business. Where an issue is known, it may be better disclosed specifically than left to become an allegation of warranty breach after completion.

6. Treat restraints as a price-protection mechanism

A buyer paying for goodwill will usually seek restraints preventing the seller from immediately competing or soliciting customers and staff. The seller should understand the duration, geography, restricted activities and persons covered. In NSW, restraint clauses are subject to a particular statutory framework and should be drafted to protect legitimate goodwill without being unnecessarily broad.

7. Get the GST treatment right in the contract

Many business sales are intended to be GST-free supplies of a going concern. That treatment depends on statutory conditions, not simply the parties writing “going concern” on the front page. The contract should reflect the intended treatment, state the relevant agreements and contain appropriate adjustment protections if the treatment is later challenged.

8. Build a real completion checklist

Completion can involve payment, stocktake, transfer of lease, keys, passwords, domain names, business names, IP assignments, releases of security interests, employee records and customer handover. The seller should know in advance what must be delivered before the purchase money is released.

9. Do not forget NSW duty issues

Revenue NSW states that transfer duty on ordinary business assets was largely abolished from 1 July 2016, but duty can still arise where the transaction includes land or an interest in land such as a lease, and in some circumstances goods associated with dutiable property. The transaction should be assessed on its actual asset mix.

Practical seller strategy

The strongest seller position is usually created before the buyer becomes emotionally and financially committed to the transaction. Prepare the documents, identify disclosure issues, set the preferred tax structure with the accountant and decide which contract risks you will and will not accept before negotiations accelerate.

Official resources

Important: This article is general information only and is not legal, tax, financial or accounting advice. The legal outcome can depend on the documents, dates and facts. Obtain advice about your circumstances before acting, particularly where a statutory deadline applies.