In preparing a business for sale, it is essential that the Seller identify all of the material Contracts and Licences that it uses as part of its business. Any purchaser of a business will want to ensure that it takes over these Contracts and Licences as part of the business purchase.
Typical for most small businesses there will be key Contracts and Licences that involve the rights to occupy where the business operates (the Lease), some businesses will operate under a Franchise or Licence arrangement with a third party (the Franchise) and some businesses will have key Contracts with suppliers or clients that are fundamental to the operation of the business (Material Contracts).
In terms of Licences, each business is different. Some businesses will have Licences permitting them to operate (for example, a Real Estate Agents Licence or Motor Vehicle Repairers Licence) or sell their product or service (for example, a Liquor Licence) or Licences that form part of the key goodwill of the business (such as Business Names, Trade Mark or software Licences utilised in the business).
Identification of Key Contracts and Licences
Before selling a business the Seller should identify and review all of its key Contracts and Licences. Where a key Contract is out of date or needs amendment, the Seller should consider rectifying its contractual arrangements before looking to sell the business. For example, a Seller may have a Lease which is due to expire. It may be worthwhile for the Seller to consider renewing that Lease so that when the business is placed on the market for sale, a potential Purchaser will be satisfied that they will be able to take over the location without fear of the expiration of the Lease.
Once the Contracts and Licences have been identified, a Seller will need to review (usually with their Advisors) whether they are capable of transferring the Contracts and Licences and the process that will need to be adopted to do so. Most Contracts and/or Licences will require approvals to be sought from third parties (for example, Landlords or Franchisors) before the Contract or Licence can be transferred. For example, most Franchise Agreements may require the Seller to first offer the business to the Franchisor before selling to a potential Purchaser (known as a “first right of refusal”).
The identification and review of all key Contracts and Licences is a fundamental first step in preparing a business for sale. It is better to identify potential problems with your Contracts and Licences before you place the business for sale rather than trying to rectify those problems once a Buyer has been found. In our subsequent article we will outline some of the processes typically involved when seeking to transfer a Contract or Licence.
If you would like to discuss a Business Sale & Purchase or require more information, please contact our team.
Written by Cameron Spanner.