There are many legal issues to consider in a business transaction process and, as we have often said in our eBooks and blogs, engaging a solicitor with experience in business sales is critical.
While your solicitor will be best placed to help you prepare for the legal aspects of a business transfer, one area I would like to highlight here is plant and equipment (P&E).
Legal issues related to plant and equipment include:
- Loans and leases on P&E
- Personal Property Securities Register (PPSR)
- Registrations and roadworthiness certificates.
Loans and leases on P&E
When purchasing plant and equipment as part of a business sale, it is normal for the purchaser to require all P&E be ‘free of charge’ i.e. that there are no outstanding leases or loans attached to those assets.
That means you as a vendor need to pay out and remove any charges ahead of a completed sale.
You will also need to ensure those leases or loans have not been registered with the Personal Property Securities Register (PPSR) by the lease or loan company or, if they have, that the register is removed once the charge is paid out.
The purchaser will want to know that all registers, claims and encumbrances are removed prior to or at completion.
Registrations and roadworthiness certificates
While P&E may be free of a charge (owned outright) it will still often have registrations and insurances associated with it, and these also need to transferred.
Specialised P&E may have industry certifications or specifications which will need to be reviewed and verified upon transfer at completion.
A good solicitor acting for you as part of the sale process, along with your broker, will help you arrange for registrations to be transferred, but sometimes this process can take quite a while.
Don't leave it to the last minute!
I have seen business sale settlements held up for weeks because registrations haven’t been transferred, roadworthiness certificates haven’t been obtained or PPSR haven’t been removed.
Careful planning by the vendor, their solicitor and business advisor upfront will avoid that very frustrating scenario.
Know what you have to transfer and work through it with the various groups involved, including the leasing firms, banks, registration body and purchaser.
Transferring a premises lease
Another issue likely to fall in the ‘Legal’ category is the transfer of a premises lease.
If you as the vendor have a landlord and your business premises lease is transferring or being assigned to the purchaser, you will need to allow some time for this process.
Typically landlords have a solicitor or legal advisor operating for them and it will take time for them to transfer and assign your premises lease to another party.
This is because the landlord and their solicitor have to be satisfied that the purchaser has the wherewithal to meet the lease terms and conditions and pay the rental.
The lease has to transfer at the same time as the business transfers upon settlement, so you need to be well planned on this matter if you hope to hit your target settlement date.
As a vendor you are the lease assignee, so you need to assure all the documentation on the lease is provided to the purchaser and their advisors and that you are oversighting that assignment process.
This is a bit of a catch-all area that may include things like:
- logos and marketing material
- logins and systems access
- licensing for software used in the business
- pre-paid advertising and other pre-paid expenses.
Here are a couple of examples:
Example 1 – You have paid $10,000 for annual Sensis Yellow Pages advertising. You paid it last month and this month you are transferring the business to a new owner. Therefore you have only owned the business for one month out of that 12-month marketing period.
Providing you have covered this issue in the sale contract, you will want to ensure the liability for the remaining 11 months is passed to the purchaser via an adjustment to the purchase price.
The purchaser will require legitimate documentation to show that you’ve actually paid upfront.
If you are paying Sensis by instalments, you need to ensure the account is transferred to the incoming purchaser so you don’t wear those expenses, providing that is also covered in the contract.
Example 2 – You are in your first month of running the business and wish to send out a direct mail communication to all past customers updating them on changes in the business and seeking their feedback.
By ensuring you have ready access to logos and marketing material artwork, you can easily action such a process without delay.
James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.