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Preparing A Business For Sale Key Legal Issues
Lynne Grant, Special Counsel
7 March 2017
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Contents
1. Options to exit your privately owned business.
2. Key legal issues which can impact on the value of a business to a buyer?
3. Due diligence and data room preparation.4. Common transaction / sale structures.
If you only remember one thing today:Preparation = Value
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Options to sell your private business
• Sell• Family handover• IPO• Wind down the business
• Today, we are focused on sale
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What are the key legal issues which can impact on the value of a business to a buyer?
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Contracts (customer, supplier, leases)
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• Are formal contracts in place? • Are complete copies available to the buyer?• Are they signed and current? • Are they in the name of the right party?
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Employment
• It’s not enough to rely on strong culture / personal relationships – a buyer won’t recognise this.
• Review standard offer letter.• Check compliance.• Make sure systems, policies and
procedures are in place.
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Corporate structure
• Often driven by tax / succession planning and may be out of date.
• Can be difficult for a buyer (and reduce value) at sale time.
• Plan the structure with a sale in mind from the start – or re-structure before the process starts.
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Intellectual property
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• Does the business rely on IP and is it protected?• Are key trade marks / logos registered?• Is the domain name registered? Who owns the content?• Are all business names registered (in the right name)?• Who owns contractor-developed IP?
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Due diligence and data room preparation
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Due diligence
• The role of due diligence is to identify the legal risks and obtaining greater certainty regarding relevant factual issues.
• “Doing your homework”.• Should always be completed by the Buyer before any
decision is made to buy the business.• Critical as this informs the terms of the sale agreement.
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Data room
• A well organised, comprehensive (and so confidence – building) data room• Respond quickly and confidently to buyer questions• Negotiate lower retention or escrow amounts and shorter retention or
escrow periods• Have less errors/gaps in the information provided, so less risk of a warranty
claim
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Most common transaction structures
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Contents
Most common sale / transaction structures are:1. Share sale2. Business / asset sale
• Pre-sale corporate structure can impact on sale structure
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Share sale
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• Buy the whole company by acquiring all of the shares
• Often provides a cleaner exit for the Seller • Company remains “as is”, so third party
contracts, leases etc don’t need to be assigned
• Employees remain with the Company – no change
• Often requires consent from counter-party to contracts following a “change in control”
• Can be > potential liability for the buyer (e.g. acquire historical tax issues, 3rd party claims etc)
• Seller faces broader scope for warranties and indemnities and possibly security
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Business / asset sale
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• Acquire specific / identified assets and liabilities – a “piece of the pie”. Cherry pick assets the Buyer wants.
• Can include fixed assets, land, machinery, stock, intangible assets (eg. goodwill and IP)
• Employee contracts will need to be terminated and new contracts entered into
• Contracts need to be assigned or new contracts entered into
• Many buyers prefer the more defined risk profile (eg. no exposure to historical claims / tax in the Company)
• Leaves “shell” of the Company for the seller to deal with
• No GST if a “going concern”
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Contact details
Russell WieseP (03) 8602 9231E [email protected]
Lynne GrantP (03) 8602 9246E [email protected]