Before a Queensland business is placed on the market, a seller should understand exactly what is being sold, who owns the relevant assets, what third-party approvals may be required and whether there are legal or commercial issues that could delay or reduce the value of the sale.

Preparing early can also make the buyer's due diligence process easier and reduce the risk of problems emerging after a business sale contract has been signed.

Business Queensland recommends allowing as much time as possible to prepare a business for sale and addressing outstanding legal, taxation and superannuation matters before going to market.

1. Decide exactly what you are selling

One of the first questions is whether the transaction will be structured as an asset sale or a share sale.

In an asset sale, the buyer purchases specified assets used to operate the business. These might include:

• goodwill;
• plant and equipment;
• stock;
• intellectual property;
• the business name;
• customer information;
• contractual rights; and
• other assets identified in the contract.

In a share sale, the buyer acquires shares in the company operating the business. The company itself generally continues to own its assets and remain subject to its liabilities.

Business Queensland identifies asset sales and share sales as the two main methods of purchasing a business and notes the significant structural difference between them.

The appropriate structure can have substantial legal, taxation and commercial consequences.

For more information, read Buying a Business: Assets vs Shares — What's the Difference?

2. Check who actually owns the business assets

Sellers should not assume that everything used in the business is necessarily owned by the entity selling it.

For example:

• equipment may be leased or financed;
• vehicles may be registered to another entity;
• intellectual property may be personally owned by a director or shareholder;
• software may only be licensed;
• premises may be leased;
• equipment may be subject to finance arrangements; and
• assets may be owned by a related company or trust.

This should be identified before the business is marketed.

If an important asset is owned by another entity, the transaction may need to be structured so that the buyer obtains the rights necessary to continue operating the business.

3. Review the ownership and business structure

Where the business is operated through a company, sellers should understand the company's ownership structure before entering negotiations.

This can include reviewing:

• current shareholders;
• share classes;
• shareholder agreements;
• company constitution;
• director arrangements;
• related entities;
• trusts; and
• agreements between owners.

A shareholders agreement or constitution may contain restrictions or procedures relevant to a proposed sale.

These issues become particularly important where not all shareholders intend to sell or where approval is required before shares or assets can be transferred.

4. Review the commercial lease

For many businesses, the lease is one of the most important components of the sale.

A café, restaurant, retail store, medical practice or other premises-based business may have little value to a purchaser if the purchaser cannot continue operating from the existing location.

Before marketing the business, a seller should review matters including:

• the remaining lease term;
• options;
• current rent;
• outgoings;
• guarantees;
• security deposits or bank guarantees;
• assignment provisions;
• landlord consent requirements;
• permitted use; and
• any existing breaches or disputes.

Business Queensland specifically recommends considering lease arrangements when preparing a business for sale and identifies leases among the legal documents that prospective buyers may want to review.

For more information, read Commercial Leases in Queensland.

5. Will the landlord consent to an assignment?

If the buyer will take over the existing lease, landlord consent may be required.

The lease should be checked to determine the assignment procedure and what information the landlord may require about the incoming tenant.

Depending upon the premises and lease, this could involve information about the proposed buyer's:

• financial position;
• business experience;
• directors;
• guarantors; and
• ability to meet the lease obligations.

For retail shop leases, additional statutory requirements may also apply.

Landlord consent should not be left until the last minute if continued occupation of the premises is essential to the transaction.

6. Review important customer and supplier contracts

A prospective buyer will often want to understand which contracts contribute to the value and ongoing operation of the business.

These may include:

• major customer contracts;
• supplier agreements;
• distribution agreements;
• service agreements;
• equipment leases;
• software agreements;
• franchise agreements; and
• other long-term commercial arrangements.

Business Queensland recommends reviewing contracts and agreements to determine whether they can be transferred to a new owner.

Some agreements can be assigned. Others may require the other party's consent or contain change-of-control provisions.

A seller should identify these issues early.

7. Make sure important agreements are documented

A business may rely heavily on relationships that have developed informally over many years.

That may work while the existing owner operates the business, but it can make the business more difficult for a buyer to assess.

Business Queensland recommends formal written arrangements with customers and suppliers rather than relying solely on informal or verbal arrangements when preparing a business for sale.

Where appropriate, having important commercial relationships properly documented can provide a prospective buyer with greater clarity about what will continue after settlement.

8. Identify the intellectual property

Intellectual property can represent a substantial part of a business's value.

Depending upon the business, this might include:

• registered trade marks;
• business names;
• logos;
• websites;
• domain names;
• copyright;
• designs;
• proprietary processes;
• software;
• databases;
• marketing material; and
• other valuable intangible assets.

The seller should establish who owns these assets and whether they can be transferred.

The PPSR recognises that security interests can potentially relate to intangible assets, including certain intellectual property rights.

If valuable IP is owned outside the selling entity, that should be addressed before the transaction progresses.

9. Check the business name

The registered business name should also be considered.

A business name is not the same thing as a company name or a trade mark.

If the business name is included in an asset sale, arrangements will need to be made for the buyer to take over the registration following the applicable ASIC process.

The sale contract should clearly identify whether the business name is included.

10. Review PPSR registrations and security interests

Before a business is sold, sellers should identify whether assets included in the transaction are affected by existing security interests.

The Personal Property Securities Register (PPSR) is the national register of security interests in personal property.

It can apply to assets such as machinery, vehicles, stock and certain intangible property. Importantly, the PPSR records security interests rather than ownership.

A buyer may conduct PPSR searches as part of its due diligence. The official PPSR guidance expressly recommends searching to determine whether assets being acquired may be subject to another party's interest.

If relevant assets are subject to finance or other security interests, the seller may need to arrange appropriate releases or other steps as part of settlement.

11. Get the financial records in order

A prospective purchaser will generally want to investigate the financial performance of the business.

Business Queensland recommends that a seller preparing a business for sale collate financial information, and its guidance for selling privately refers to assembling financials for at least the previous three years.

Depending upon the business, a buyer may request information concerning:

• profit and loss statements;
• balance sheets;
• tax returns;
• BAS records;
• sales information;
• payroll;
• expenses;
• debtors and creditors;
• stock;
• major capital expenditure; and
• financial forecasts.

The seller's accountant will often play an important role in preparing the business for sale.

12. Identify related-party transactions

Related-party arrangements can become an issue during due diligence.

For example, the business might:

• lease premises from a related entity;
• use equipment owned by a director;
• receive management services from another company;
• borrow money from shareholders;
• share employees with another business; or
• use intellectual property owned elsewhere.

These arrangements should be identified so the seller can explain whether they will continue after settlement or need to be replaced.

A buyer needs to understand what the business will look like after the seller and its related entities are no longer involved.

13. Prepare for buyer due diligence

A well-prepared seller should expect a buyer to conduct due diligence.

The buyer may want to investigate:

• financial performance;
• assets and liabilities;
• material contracts;
• leases;
• employees;
• intellectual property;
• licences;
• disputes;
• regulatory matters;
• insurance;
• PPSR registrations; and
• other risks associated with the business.

Business Queensland recommends preparing documents for prospective buyers and specifically identifies financial, operational and legal records as part of the sale process.

For more information, read Due Diligence When Buying a Business in Queensland.

14. Protect confidential business information

Selling a business usually requires giving prospective buyers information that would not ordinarily be made public.

That may include:

• financial results;
• customer information;
• pricing;
• margins;
• supplier arrangements;
• business strategies;
• employee information; and
• proprietary information.

Sellers should consider how information will be disclosed and whether a confidentiality agreement or non-disclosure agreement (NDA) should be entered into before sensitive material is provided.

Access to particularly sensitive information can also be staged so that more detailed material is only provided once a prospective buyer has demonstrated genuine interest.

Privacy obligations should also be considered where personal information is involved.

15. Consider employees before the sale

Employees can be one of the more complicated parts of a business sale.

The parties should determine:

• which employees may be offered employment by the buyer;
• how accrued entitlements will be dealt with;
• whether service will be recognised;
• whether redundancies may arise;
• how employee information will be disclosed; and
• when employees should be informed.

Under the Fair Work framework, a transfer of business can occur where specified requirements are met, including where an employee begins working for the new employer within three months, performs the same or substantially the same work and there is the required connection between the employers.

A new employer must recognise prior service for some employee entitlements, while different rules can apply to matters including annual leave, redundancy, long service leave and certain other entitlements.

The employment consequences should therefore be considered before the business sale contract is finalised.

16. Check licences, permits and approvals

Some businesses cannot operate without particular licences or regulatory approvals.

Examples may include businesses operating in hospitality, childcare, health services, building and construction or other regulated industries.

A seller should identify:

• what licences the business currently relies upon;
• who holds them;
• whether they can be transferred;
• whether the buyer must make a new application; and
• how long approval is likely to take.

If a particular licence is essential to the business, the contract may need to make settlement conditional upon the buyer obtaining the required approval.

17. Decide what is included and excluded from the sale

The parties should not rely on assumptions about what comes with the business.

The seller should identify what will be included, potentially covering:

• goodwill;
• plant and equipment;
• stock;
• vehicles;
• intellectual property;
• business name;
• website;
• domain names;
• telephone numbers;
• customer databases;
• social media accounts; and
• other operating assets.

Any assets the seller intends to retain should also be identified.

Business Queensland recommends deciding what tangible and intangible assets will form part of the transaction before listing the business.

18. Consider stock and work in progress

Stock is often dealt with separately from the headline purchase price.

Before marketing the business, sellers should understand:

• how stock will be valued;
• whether there will be a stock cap;
• whether obsolete or damaged stock will be excluded;
• when the stocktake will occur; and
• how stock will be paid for.

For service businesses, professional practices and businesses with long-running projects, work in progress may also require specific treatment.

The contract should make clear how these amounts will be determined.

19. Think about the restraint of trade

A purchaser paying for the goodwill of a business will commonly want protection against the seller immediately establishing a competing business and taking customers with them.

This may result in the proposed contract containing restraint provisions dealing with matters such as:

• competing businesses;
• geographical areas;
• time periods;
• customers;
• suppliers; and
• employees.

The appropriate scope depends upon the business and circumstances.

Sellers should understand the practical effect of a proposed restraint before agreeing to it, particularly if they intend to continue working in the same industry.

20. Obtain tax and accounting advice early

The way a business sale is structured can have significant taxation consequences.

Depending upon the circumstances, issues may include:

• capital gains tax;
• GST;
• treatment of trading stock;
• allocation of the purchase price;
• employee entitlements;
• company or trust consequences; and
• other taxation matters.

Queensland transfer duty may also be relevant to the transaction. Queensland Revenue Office identifies a range of Queensland business assets that can be dutiable, including goodwill, business names, statutory business licences, franchise rights, intellectual property, trading stock and plant and equipment.

Taxation and accounting advice should therefore ideally be obtained before the seller commits to the structure and commercial terms of the transaction.

21. Be careful with a heads of agreement

A seller may be asked to sign a document described as a:

• heads of agreement;
• term sheet;
• memorandum of understanding;
• offer; or
• letter of intent.

The document might appear preliminary, but its legal effect depends upon its wording and circumstances.

It may also establish important commercial terms that become difficult to renegotiate later.

These can include:

• purchase price;
• deposit;
• assets included;
• due diligence period;
• exclusivity;
• confidentiality;
• restraint provisions;
• settlement date; and
• conditions of the transaction.

Legal and accounting advice is therefore best obtained before, rather than after, the seller commits to the structure of the proposed deal.

22. Should you have a business sale contract prepared before finding a buyer?

Not necessarily in every case, but it is useful to consider the likely contractual structure before negotiations become advanced.

A business sale contract needs to deal with considerably more than price.

Depending upon the transaction, it may address:

• assets included and excluded;
• stock;
• employees;
• lease assignment;
• conditions precedent;
• licences;
• warranties;
• restraints;
• adjustments;
• settlement arrangements;
• training and handover; and
• default provisions.

Having the key issues identified early can make negotiations more efficient once a buyer is found.

23. What will the buyer investigate?

A buyer will generally want to know whether the business they think they are purchasing is actually the business they will receive at settlement.

That may mean asking questions such as:

• Are the reported earnings sustainable?
• Will the lease continue?
• Can the key contracts be transferred?
• Will important employees remain?
• Does the seller own the IP?
• Are assets subject to security interests?
• Are licences transferable?
• Are there undisclosed liabilities?
• Are there disputes?
• Are important customers likely to remain?

Sellers who anticipate these questions are generally better positioned to respond efficiently during due diligence.

24. What happens once a buyer is found?

Once the commercial terms have been negotiated, the parties will generally move towards preparing and signing the business sale contract.

There may then be a period between signing and settlement during which the parties deal with matters such as:

• due diligence;
• finance;
• landlord consent;
• employee arrangements;
• licences;
• third-party consents;
• PPSR matters;
• stocktake;
• settlement adjustments; and
• handover preparations.

Start preparing before the business goes on the market

The legal preparation for a business sale should ideally begin before a buyer has been found.

By reviewing the structure, assets, lease, contracts, employees, intellectual property, licences and security interests early, a seller has an opportunity to identify problems while there is still time to address them.

It can also make the business easier for a prospective purchaser to investigate and reduce the risk of an unexpected issue disrupting the transaction.

For an overview of the broader sale process, read Buying or Selling a Business in Queensland: Key Legal Considerations.

This article provides general information only and is not legal, taxation, accounting or financial advice. Business sales vary and advice should be obtained about the particular transaction and business structure.