Selling a business in Australia is a complex process that requires careful legal planning to ensure a smooth transaction and mitigate risks. Whether you are selling a small business or a large corporation, it is crucial to follow key legal steps to safeguard your interests and comply with Australian laws. This includes understanding contract terms, transferring licenses, assets (including intellectual property rights) and leases, managing employee entitlements, considering tax implications, and ensuring compliance with relevant laws and regulations. Below are the essential legal steps in selling a business in Australia.
Due Diligence: Preparing Your Business for Sale
Due diligence is a critical stage in the business sale process, allowing both the seller and the buyer to assess the value and risks associated with the business. From the seller’s perspective, due diligence ensures that all necessary financial, legal, and operational documents are in order before engaging in negotiations. Maintaining confidentiality during the sale process is crucial.
Proper due diligence can help avoid future disputes and tax law breaches while increasing buyer confidence.
Key Aspects of Due Diligence
- Financial Review – Preparing financial statements, tax records, and profit/loss statements to present a clear financial picture to potential buyers.
- Legal Compliance – Ensuring business licences, permits, intellectual property (IP) rights, and contracts are valid and up to date.
- Employee Matters – Reviewing employee contracts, entitlements, and potential liabilities under the Fair Work Act 2009 (Cth). Failure to comply with employment laws may lead to legal liabilities, such as claims for unfair dismissal, underpayment of wages, or workplace safety violations.
- Taxation Considerations – Examining tax implications such as capital gains tax (CGT), stamp duty, goods and services tax (GST), income tax, payroll tax, and other applicable taxes.
- Commercial Contracts & Leases – Reviewing supply agreements, customer contracts, lease agreements, intellectual property rights, asset ownership, and confidentiality obligations to identify potential obligations that could affect the sale.
Structuring the Sale: Asset Sale vs. Share Sale
One of the first decisions when selling a business in Australia is whether the sale will be structured as an asset sale or a share sale. Each structure has distinct legal and tax implications.
Asset Sale
- The buyer purchases specific assets of the business (e.g., equipment, goodwill, intellectual property, and customer contracts).
- The seller retains ownership of the legal entity (company or trust).
- The buyer avoids inheriting liabilities (unless specifically agreed upon).
- Consent may be required from third parties (e.g., landlords, suppliers, or contract counterparties).
Share Sale
- The buyer acquires shares in the company, taking over all assets and liabilities.
- Minimal disruption to business contracts and operations.
- The buyer assumes existing liabilities, including tax and employment obligations as per fairwork.
- Regulatory approvals (e.g., Australian Securities and Investments Commission (ASIC) requirements) may apply. You can read more on the ASIC requirements here.
The choice between an asset or share sale depends on factors such as tax efficiency, risk exposure, and business continuity. Legal and tax advice should be obtained before finalising the structure.
Key Contractual Pitfalls in Selling a Business
The business sale agreement is the most critical document in the transaction, outlining the terms and conditions of the sale.
Common Legal Pitfalls
- Unclear Purchase Price and Payment Terms
- Defining whether the purchase price is fixed, subject to adjustments, or contingent on business performance (e.g., earn-outs).
- Setting clear terms for deposits, payment timelines, and financing arrangements.
- Inadequate Warranties and Indemnities
- Sellers typically provide warranties about the business’s financial health, contracts, and legal compliance.
- Buyers often seek indemnities to cover potential liabilities (e.g., tax debts, undisclosed litigation).
- Failing to properly negotiate these clauses can lead to post-sale disputes.
Non-Compete & Restraint of Trade
- Preventing the seller from starting a competing business within a specified timeframe and geographic area.
- Courts in Australia assess whether such clauses are reasonable and enforceable.
- Non-compete and trade restraint clauses must comply with competition law principles under the Competition and Consumer Act 2010 (Cth), which prohibit anti-competitive conduct.
- Tailoring non-compete clauses to be reasonable and defensible is essential.
Employee Transfer Issues
- Determining whether employees will transfer to the new owner under the Fair Work Act 2009 (Cth) as part of a transfer of business.
- Negotiating redundancy payments, accrued leave entitlements, and employment contract variations.
- Engaging a lawyer to draft and review the sale agreement is essential to avoid legal risks and ensure clarity in the contract.
Regulatory Compliance & Approvals
Certain business sales in Australia require regulatory approvals and compliance with specific laws.
Key Regulatory Considerations
- ACCC Approval – If the sale involves a merger or acquisition that may reduce competition, approval from the Australian Competition & Consumer Commission (ACCC) may be required.
- ASIC and Business Name Transfers – If selling a company, changes to directorships and ownership must be updated with ASIC.
- Foreign Investment Review Board (FIRB) Approval – The Foreign Acquisitions and Takeovers Act 1975 (Cth) regulates certain acquisitions of Australian assets by foreign persons.
- Industry-Specific Licences & Permits – Businesses in regulated industries (e.g., hospitality, healthcare, financial services) may need approval from industry regulators.
Post-Sale Legal Risks & Dispute Resolution
Even after the sale is completed, legal risks may arise.
Key Post-Sale Legal Issues
- Breach of Warranties or Indemnities – If the buyer discovers undisclosed liabilities or misrepresentations, they may claim damages for breach of contract.
- Disputes Over Earn-Outs or Deferred Payments – Clearly defining performance metrics can help prevent conflicts.
- Restraint of Trade Enforcement – If the seller breaches a non-compete clause, the buyer may seek an injunction or damages. Courts assess whether the restraint is reasonable and necessary to protect business goodwill.
Litigation & Alternative Dispute Resolution (ADR)
- Mediation or arbitration clauses in the sale agreement can provide mechanisms to resolve disputes efficiently.
- If litigation is necessary, proceedings may be brought in the relevant state or federal court.
- Ensuring a well-drafted contract and keeping open communication between parties can help minimise post-sale disputes.
Conclusion
Selling a business in Australia involves a series of legal steps, from due diligence and structuring the sale to regulatory compliance and dispute resolution. Careful legal planning, clear contractual agreements, and professional legal advice can ensure a smooth transaction while protecting the interests of both the seller and the buyer.
Given the complexity of business sales, engaging an experienced commercial lawyer is essential to manage potential legal risks and achieve a successful sale.
The Allied Legal commercial legal team has extensive experience assisting clients in buying and selling businesses. We can help you draft or review a comprehensive sales agreement and other related contracts, negotiate the terms of a sale, and represent your interests throughout the entire process to ensure compliance with Australian laws and regulations. Contact us today for expert legal guidance.
