When a business is sold and the sale is completed, the deal Is not quite over. Often the sale agreement may contemplate ongoing obligations and in addition to these items, a Seller needs to tidy up their affairs post sale. Some of the more common post settlement matters that a Seller needs to consider include:
- Earn Outs;
- Restraint of Trade;
- Return of your lease guarantee/deposit; and
- Review of your financial accounting.
Ongoing Training – Handover
When selling a business, a Seller will typically offer to provide training or hand over pre and post settlement. The amount of training after settlement will typically depend upon the key man nature of the business and whether specific skills or relationships need to be handed over. The more aligned a Seller is associated with a key person (for example, the founder of the business), the more likely that a Purchaser will require them to provide post completion training, hand over and assistance.
For a Seller, the length of post settlement training, the expectations about how that training is provided (whether in person, online), how onerous that training (that is, full time, part time or intermittent) and whether the post completion assistance will be remunerated are all considerations for the Seller.
In some instances, the post settlement obligation is formalised as an ongoing employment or consultancy arrangement. In those circumstances, the terms of the arrangement including term, role and remuneration should all be agreed and documented before the completion of the sale.
For many business sales, a Seller may as an inducement to reach a particular sale price agree to an earn out arrangement. At its simplest, an ‘earn out’ is where the Purchaser agrees to pay the Seller additional amounts if certain performance thresholds are met within a particular time. Typically, the matters which form the threshold concern reaching certain turnover and/or profit targets or otherwise the retention of key clients/contracts.
From a Seller’s perspective, how you structure the price and the earn out are fundamental parts of doing the deal. When the deal is done, the Seller needs to consider what controls and contributions they will need to make to achieve the threshold tests. Clearly, the more difficult the threshold the more likely the ongoing involvement of the Seller may be required to ensure that Purchaser exercises the right action and commitment to achieving those thresholds.
Restraint of Trade
As A Seller is often required to agree to non solicitation and restraint provisions. A restraint of trade effectively prohibits the Seller (and its key person) from engaging in a similar business within a agreed time and geographical territory. A non solicit obligation, often requires the Seller (and key person) to not engage with key clients, suppliers or employees of the Business for an agreed period of time.
Given that a Purchaser is paying for a the ‘goodwill’ of the business, it is not unusual for the Purchaser to seek to restrain the Seller for a period of time after the sale. From a Seller’s perspective the timeframe and geographical scope of the restraint are key matters which should be negotiated and agreed during the deal making process.
Post settlement, it is important that the Seller understand the terms of your restraint and seek to adhere to those promises. If the Seller ignores these matter, the Seller could be subject to court proceeding whereby orders are made to stop the Seller infringing the restraint (called “injunction) and/or be subject to a claim for compensation from the Purchaser. By properly understanding the restraint, the Seller will be less likely to breach the restraint and thus limit any post completion issues.
Relinquishment of Guarantees and Return of Monetary Deposits
The Seller may in support of its business operations provided personal guarantees and/or monetary security. For example, where a business leases premises, the Landlord will often require personal guarantees and bonds be paid.
Where key contracts (such as a Lease) have been transferred, a Seller will need to ensure that after completion they receive a return of their security deposits. Ideally, if guarantees are provided, it should also be negotiated that any personal guarantees are released.
Most business will have liabilities that need to be paid on settlement or afterwards. Trade accounts, bank loans, equipment finance are typical business liabilities that need to be discharged. When finalising the sale of a the business, and particular when the money is received, the Seller will need to conduct a review of its financial obligations paying off any amounts owed by the business (this may be part of the settlement payment directions).
Sellers also need to consider and deal with the tax implications of their sale. Obviously, the potential tax implications of a sale should have been analysed before selling the Business. Once the business is sold, the Seller needs to work with their accountant to finalise their tax arrangements. As part of that process, maximising concessions and exemptions from tax (for example, Small Business CGT Relief) is critical.
As much as a Seller would like to think that everything finished once the sale is completed, it is often the case that other issues and obligations continue post settlement. Understanding those obligations will ensure that the Seller is better placed to properly and successfully navigate the ultimate sale of their business.
If you would like to discuss a Business Sale & Purchase or require more information please contact: Heath Adams (Director-Lawyer), Amelia Hatton (Associate) or Shalvin Kumar (Solicitor).
Written by Heath Adams.