Steps 9 & 10 of 10 on how to prepare for a successful business sale
Mar 24, 2023
9. Understand contracts and the settlement process
Contract of Sale
- Your broker will compile all information about the offers, conditions and terms on your behalf and work with your lawyer to create a draft contract of sale.
- The final copy is produced for sign-off once all parties have reviewed the contract and made any necessary changes
- Once the last person signs the Contract of Sale, the DEPOSIT amount will be paid by the buyer into a trust account nominated and detailed on the sale contract.
- A 'retention amount' is included in some sales contracts, particularly very large transactions with complex share sale conditions, performance based payouts and warranty provisions.
- Is paid into a trust account for safekeeping until it is released to the vendor.
- If the conditions of the sale contract are not satisfied, the buyer’s deposit becomes refundable.
- Is generally released to the vendor 24-48 hours post-settlement.
When the sale contract becomes unconditional
- The contract is unconditional once ALL CONDITIONS of the sale are satisfied, including finance clauses, Due Diligence, lease reassignments and staff engagements.
- At this time, the deposit is deemed the property of the vendor and, in theory, could be released to the vendor with the buyer’s lawyers’ permission.
- Most sale contracts will not complete all conditions until shortly before, or on, settlement.
What is the settlement process?
Once both sides have agreed that everything required has been provided, the money changes hands and the business belongs to the buyer.
How does it occur?
- A settlement is usually performed in a virtual space on the date stated on your contract of sale.
- Lawyers, vendors and buyers go through a prepared list of items in accordance with the sale contract, and checklists supplied by your broker.
- The buyer’s lawyer must provide evidence that any items required for the transition of the business have been provided to them.
- The buyers must check that everything - operation manuals, keys, petty cash, staff agreements, utilities - are all dealt with.
- Settlement itself is a simple email from the vendor’s lawyer to say that settlement has been deemed as complete.
- Vendors often fear that settlement will either be delayed or not occur
- Not every settlement goes to plan, there are gremlins that can pop up.
- Having an experienced broker and lawyer on your team makes it rare for a settlement not to take place because every aspect will be organised, checked, cross-checked, and any potential issues identified prior to conducting the settlement process.
- Sometimes it is necessary for alternative arrangements to be put in place to allow settlement to proceed.
- Settlements can have additional terms applied on the day to overcome any issue that may need to be rectified post-settlement.
10. What can go wrong?
Attention to detail, buyer screening, sharing of correct information and close involvement with both parties from start to finish are critical to ensure successful settlements.
TOP 10 reasons why a business sale falls through prior to settlement
- Finance is not approved
- Lease is not approved for reassignment to the buyer
- Franchisor doesn't approve the buyer (for franchise deals)
- Vendor changes their mind
- Buyer gets cold feet
- Staff panic and leave
- Disagreements about staff, included assets, P&E
- Lawyer - engaging the wrong type.
- Vendor and Buyer don't get along.
- Trial period (for cash businesses) and/or Due Diligence do not translate into original sale or profits as quoted by the vendor.
A business sale is highly complex. Engaging the right broker and team is critical to deal with any issues and problems that arise during this lengthy process.