THINKING ABOUT SELLING YOUR BUSINESS? THE VERY IMPORTANT REASONS WHY YOU SHOULD OBTAIN LEGAL ADVICE!
When clients think of selling their home or an investment property, they should first consider obtaining legal advice before taking that big step. Lawyers will then provide advice, drafting and preparing the terms of the contract of sale and act on behalf of the clients during the conveyancing process up until settlement. However, there are many who do not see the importance of obtaining legal advice when considering selling their business. Just like selling your home, selling a business is also a big step and a decision that requires appropriate advice and guidance before signing on the dotted line.
Unfortunately, this example is a reality that lawyers here at De Marco Lawyers have encountered. This case study provides a background of where a client sold his business to a purchaser but unfortunately decided not to have lawyers assist him with completing the settlement of the sale of the business. This unfortunately led to further problems with the purchaser and the potential risk of the purchaser initiating legal action against the vendor.
In this case a client entered into a sale of business contract with a purchaser. The client subsequently retained De Marco Lawyers to assist him complete the transfer of the lease of the business premises from him to the purchaser, who would become the new tenant. We advised the client of the steps involved in not only the transfer of lease but also the sale of the business. When selling a business there are steps which both parties must follow. They include the following:
Both parties must understand the key commercial terms of the sale, such as the purchase price, equipment list and restraints of trade;
The Vendor must also provide a section 52 Statement (for sale of business at a price of up to $450,000) to the purchaser which sets out the financial performance of the business over the last two years;
Consent of the landlord must be obtained prior to transferring the lease. Once consent has been provided by the landlord, the transfer of lease documentation must be prepared and executed by the landlord, old tenant (the vendor) and new tenant (the purchaser); and
Arranging a date for settlement. This includes doing a stocktake of inventory, organising a transfer of assets (if any), adjustments of any outgoings on the lease (e.g. Water and council rates) and adjustments on any employee entitlements.
However, to save on costs, the client did not want any assistance with the sale of the business and simply requested that we act on his behalf for the transfer of lease. The client then decided to organise settlement on his own with the purchaser (without any lawyers for both parties) and failed to take into consideration: the transfer of equipment; and making adjustments for outgoings.
Some couple months after settlement, the vendor subsequently received a letter from the purchaser’s solicitor raising issues with the sale of business. These included alleged issues with the information contained in the Section 52 Statement, allegations of restraint of trade provisions and use of the equipment. The client then urgently came to our offices seeking our urgent assistance to respond to these allegations and to diffuse any possibility of the purchaser initiating legal action against him. Whilst we were able to mitigate these issues for the client, it created additional unnecessary legal expenses and took much of the client’s time. If the client at the time of selling the business had received legal advice, then the time to obtain advice to understand the terms of the contract and had lawyers act on his behalf up to and including settlement, these alleged issues would not have occurred. The client would have saved more money and time instead of having the headache of a potential legal action against him.
Whilst we understand that some clients may be strapped financially, or some clients think that they can do things themselves – unfortunately, that is not always the case. When it comes to situations where you are considering buying or selling something - whether it is a car, home or a business - irrespective of the value, it is always important that you get the appropriate advice. A tiny cost for that advice is better off than a large hit to your pocket if you do not get the appropriate advice and end up with a greater problem later on.
This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.
DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from De Marco Lawyers and other relevant experts.