Frequently asked questions

Who are the key advisers that I should appoint to sell my business?

It's important to surround yourself with reputable, well credentialed professional advisers to help you successfully navigate and execute your sale transaction.

A corporate/M&A adviser is often critical. They act as "business broker" or intermediary between you as seller, and the buyer (or potential buyers in a competitive sale process). They typically help with:

strategic advice
identifying potential buyers or investors
communications
negotiating key commercial terms (including purchase price)
corporate/financial advice (including financial modelling)
deal execution (e.g. preparing sales and marketing material, running the due diligence process and generally coordinating and project managing the transaction process).

One of the key benefits of using a corporate/M&A adviser is that they allow you to focus on running your business at a time when there may otherwise be various practical and emotional distractions.

A specialist corporate/M&A lawyer is essential. They provide advice on various legal risks and issues associated with the proposed transaction, as well as prepare, negotiate and finalise the legal documentation to give effect to the proposed transaction. It's important to appoint someone who understands the particular dynamics of an M&A transaction, and can strike the right balance between managing downside risk, and being commercial and pragmatic in moving the deal forward.

Depending on the deal structure, complexity and your particular circumstances, it may also be necessary to appoint separate tax and/or accounting advisers to help with various tax and accounting aspects of the proposed transaction.

Many professional services firms have multiple service lines, which can therefore provide many of these advisory services under the one banner. However, in our experience, most founder-sellers prefer to have a degree of independence between at least some of their professional advisers, particularly when it comes to selecting a lawyer.

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What can I do to ensure my business is "sale ready"?

There are various "exit readiness" matters that you can attend to at an early stage, to ensure your business is "sale ready" and the transaction progresses smoothly and efficiently. These include:

ensuring that all of the assets relevant to the target business sit within the "transaction perimeter" (i.e. within entities that will be sold). If not, consider implementing a pre-sale restructure
considering the optimal "sale structure" to achieve your and the buyer's commercial objectives (e.g. share sale, asset sale, the level in a corporate group at which the sale should take place). This will often be driven by tax and/or legal considerations, for example: What are the capital gains tax (CGT) implications for the seller of a particular sale structure? Who, by default, should assume the historic liabilities (i.e. legacy issues) of the target business? If there are trust entities within the target group, will the buyer be willing to maintain those entities as part of the target group going forward?
where there are multiple shareholders, considering whether all of those shareholders are "commercially aligned" on a proposed sale, i.e. whether they'll voluntarily enter into and/or unanimously approve the proposed transaction
considering whether any approvals from regulators (such as FIRB, ACCC, or industry-specific regulators) and consents from third parties (such as suppliers, customers, landlords and lenders) will be necessary to implement the proposed transaction
ensuring that the company's corporate records (e.g. share registers) and public filings (e.g. ASIC records) are up to date and complete
considering whether some "vendor due diligence" should be undertaken in advance of the buyer undertaking their due diligence, to identify and remedy issues that the buyer or potential buyers may be concerned about when conducting their due diligence.

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How does the sale process typically proceed? What are the key events and milestones?

The dynamics of each sale transaction are unique, and will depend on whether the sale process is competitive (i.e. involving multiple potential buyers) or non-competitive (i.e. with an agreed/pre-determined buyer).

Regardless of the form of the sale process, it will include:

entry by the buyer, or potential buyers, into a non-disclosure agreement to protect the confidentiality of information exchanged between the parties
initial due diligence by the buyer or potential buyers, which may include reviewing key information about the target business, such as information memorandum and accounts, and initial meetings with the founders
submission by the buyer or potential buyers of a non-binding indicative offer (NBIO) or letter of intent (LOI), or entry by the parties into a non-binding term sheet
confirmatory due diligence by the buyer. This may be undertaken on an "exclusive" basis depending on the particular dynamics of the deal, and is often undertaken by the buyer with the assistance of externally-appointed advisers (e.g. financial/accounting, legal and tax ). This often involves an information disclosure process with the buyer through an online data room (a repository of information and documents), Q&A, further management meetings, and potentially site visits
preparation, negotiation and finalisation of legally-binding sale documentation to give effect to the proposed sale
entry into the sale documentation
satisfaction of various conditions precedent to completion, such as receipt of regulatory approvals and/or third party consents, and actioning of other pre-completion items
completion of the sale.

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What is due diligence? What does it typically involve and how long does it take?

Due diligence is the investigation and appraisal of a target business by the buyer to identify risks and issues and confirm key commercial terms (e.g. the purchase price) before entering into legally-binding sale documentation.

The key "heads" of due diligence for an M&A transaction are typically financial/accounting, legal and tax. However, depending on the size and nature of the target business and the degree of comfort that the buyer wishes to obtain, due diligence may also encompass other areas such as commercial & operational, customers, market analysis, employment & HR, IT & cyber security, environmental, and ESG.

A formal due diligence process typically involves the disclosure of information and documents about the target business in an online data room, responses to questions and requests for information by the buyer, and meetings with key management personnel. Given how time-consuming and resource-intensive this process can be, it is often coordinated and managed by the seller's corporate/M&A adviser.

To mitigate the seller's legal risk under the proposed transaction, a key benefit of conducting such a formal process is that, for Australian deals, information that has been "fairly disclosed" to the buyer as part of this process would typically provide a "shield" against the seller's exposure to the buyer under certain warranties in the sale documentation. In other words, if the seller has been transparent with the buyer and "fairly disclosed" information to the buyer prior to entering into a legally-binding sale documentation, the buyer is deemed to be "on notice" of such information and cannot then make certain warranty claims against the seller in respect of matters to which such information relates.

The timeline for due diligence varies from deal to deal, and is affected by matters including how detailed a due diligence exercise the buyer wishes to undertake, the size and nature of the target business, the quality of information and documents available, the speed at which the parties submit and respond to questions and requests for information, and the resources available to the parties to progress and finalise the process. It can be as short as 2-4 weeks, is typically around six weeks, but can also last 8 weeks or longer.

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How would the sale of my business typically be documented?

The precise form of the legally-binding sale documentation (to be prepared, negotiated and finalised by the parties' lawyers) depends on the structure of the proposed transaction.

Most commonly, there is some form of sale and purchase agreement. For a share sale, this is typically labelled a "share sale agreement" or "share purchase agreement". For an asset sale, this is typically be labelled an "asset sale agreement" or "asset purchase agreement".

Normally, there is a period of time between entering into the sale documentation and completing the sale, to allow for various conditions precedent to be satisfied. For example, if any regulatory approvals and/or third party consents are required to implement the sale, these are typically sought between signing and completion. In other words, parties will normally require the contractual certainty of a legally-binding sale agreement before engaging with regulators and/or other third parties in connection with the sale. However, if the parties "front-end" these matters and action other pre-completion and completion items and deliverables before entering into the sale documentation, it's possible for the transaction to sign and complete simultaneously.

If you are to remain employed or engaged with the business in an executive or consultancy capacity after the sale is completed, then it is also fairly common for the buyer to require you to sign up to a new employment or consultancy agreement.

If the transaction structure has a "scrip" component (i.e. involves you acquiring shares in the buy-side vehicle as part of your consideration), then you may wish or be required to sign up to some form of shareholders agreement. This will regulate your rights and obligations as a shareholder going forward. Those rights and obligations will depend on the identity and nature of the other shareholders/investors, as well as whether you'll be holding a minority or majority (controlling) interest in the buy-side vehicle. For example, arrangements in a shareholders agreement between founders "rolling into" a buy-side vehicle with a strategic/trade buyer will often look very different to arrangements between founders partnering with financial sponsors, such as private equity or venture capital, especially in relation to governance, management and control of the buy-side vehicle and future exit and liquidity opportunities.

On deals with financial investors, it is fairly common for founders to receive some form of "management equity", which "vests" on the satisfaction of various performance and/or tenure conditions.

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How can I maximise the prospects of the sale of my business successfully completing?

Deal certainty should be a paramount consideration for founder sellers and their advisers.

Ensuring that your business is "sale ready" should help to facilitate a smooth and efficient sale process.

At the early stages of the process (i.e. at the NBIO or term sheet phase, and before entry into legally-binding sale documentation), buyers may seek a period of exclusivity in order to conduct their confirmatory due diligence and work on the sale documentation. Depending on the dynamics of the particular sale process, including the degree of competitive tension and associated leverage of the parties, you as the seller may (as the "price to pay" for conferring exclusivity) wish to consider requiring the buyer to pay a "reverse break fee" or "exclusivity fee" in certain circumstances. This applies, for example, if the buyer were to "walk away" from the deal and/or "price chip" during the next phase of the process.

After entering into legally-binding sale documentation but before completing the sale, deal certainty can best be promoted by minimising conditionality in the sale agreement, particularly where satisfaction of those conditions is outside the control of the seller. For example:

any condition in the sale agreement whose satisfaction is within the buyer's control is "high risk" from the seller's perspective. The buyer could, between signing and completion, engineer a situation where the condition is not satisfied, and therefore "walk away" from the deal if the buyer changes their mind and no longer wishes to proceed with the acquisition
a "material adverse change" condition, which confers on the buyer a right to "walk away" from the deal if there is a "material adverse change" to the target business, may be "high risk" from the seller's perspective. This depends on the expected circumstances, including financial position and performance, of the target business between signing and completion (which may or may not be foreseeable); the length of time between signing and completion, and how broadly that condition is drafted
other proposed conditions that could give the buyer a right to "walk away" from the deal on a "hairline trigger" (such as termination rights in favour of the buyer for minor breaches of the sale agreement) should be resisted
proposed conditions that are broad, vague or imprecise should, if otherwise appropriate, be "tightened" so that the seller has certainty as to what needs to be done before the sale can complete. For example, a condition requiring the receipt of "any and all regulatory approvals and third party consents which may be necessary or desirable to implement the proposed transaction" is too broad, and should be narrowed to articulate the precise regulatory approvals and third party consents, if any, which must be obtained.

To assist with these matters, it's important that founders are supported by a strong team of advisers who understand the particular dynamics of an M&A transaction.

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What purchase price may I receive for the sale of my business?

The most important consideration for you when selling your business is the purchase price payable by the buyer.

The two main types of purchase price (or "consideration") payable are cash consideration and scrip consideration. Cash consideration is the most common and straightforward form of consideration, where the buyer pays cash to the selling shareholder or shareholders. Scrip consideration refers to shares or other securities in a corporate buy-side vehicle being issued to the selling shareholder/s as consideration for the sale of their shares. Such a transaction is commonly referred to as a "scrip-for-scrip" merger or "rollover" transaction, which may be full or partial.

There are many reasons for which parties may choose to adopt a pricing and payment structure that includes scrip consideration. For example:

the buyer may have insufficient cash resources to fund the acquisition
the buyer may wish to incentivise founder sellers who are remaining with the target business post-completion by giving them an ownership interest in the combined business, and therefore an opportunity to participate in any future upside
scrip consideration may offer tax advantages to the selling shareholder/s (e.g. CGT rollover relief)

A transaction structure may also involve other purchase price arrangements, including deferred consideration, earn-outs or contingent consideration, and retention (or escrow) arrangements.

Deferred consideration involves the buyer paying part of the purchase price on completion of the sale, with the balance of the purchase price payable in one or more future (deferred) instalments. Where deferred consideration is a feature of your transaction, the buyer will often have contractual rights to set off against those deferred payments any claims the buyer has against the seller under the warranties and indemnities in the sale agreement.

Earn-outs (or contingent consideration) are where part of the purchase price is calculated by reference to the future financial performance of the target business. Earn-outs are typically based on financial metrics such as earnings (EBITDA), revenue or gross profit, and are often subject to minimum floors, maximum caps and scaling. They help to bridge the valuation gap between buyer and seller, and are commonly used as a management incentive where founder sellers will continue to work in the target business post-completion. If earn-outs are a feature of your transaction, it's important to surround yourself with a strong team of legal and financial/accounting advisers to help navigate various potential issues and traps. For example, contractual protections should be put in place to ensure the financial performance of the target business during the earn-out period cannot be manipulated by the buyer in a way that could undermine the achievement of the earn-out. Also, the sale agreement should set out a specifically-negotiated set of "normalisation" accounting principles, to ensure the financial performance of the target business during the earn-out period is measured on a "like-for-like" basis with the financial performance of the target business prior to completion of the sale.

Retention (or escrow) arrangements involve the buyer retaining part of the purchase price at completion of the sale (or paying that to an escrow agent), in order to secure certain post-completion obligations of the seller under the sale agreement. For example, a retention (or escrow) would typically be used to secure the seller's liability for claims under the warranties and indemnities in the sale agreement, or to secure the seller's payment obligations where the purchase price may be adjusted after completion against the seller on the basis of completion accounts. Where a transaction involves retention (or escrow) arrangements, it's generally advisable to have the buyer pay the escrow amount into a blocked account (i.e. escrow account) on completion. An escrow account is often operated by an independent third-party escrow agent at the direction of both parties, to ensure that neither party can authorise payment out of the escrow account without the agreement of the other party. The funds will be released in accordance with the parties' directions as required by the terms of the escrow arrangements in the sale agreement.

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How would the purchase price for the sale of my business typically be adjusted?

One of the most critical, and least understood, considerations when selling your business is which purchase price adjustment mechanism to use in the sale agreement.

A purchase price adjustment mechanism refers to the process used to determine the final price to be paid for a target business by the buyer. It establishes how the initial price offered by the buyer will be adjusted to reflect the value of the target business at the time of completion of the sale.

The two most widely used mechanisms are completion accounts and locked box.

Completion accounts

Completion accounts are financial statements that provide a snapshot of a business's financial position at the time of deal completion. This mechanism incorporates a post-completion adjustment to the price agreed when signing the sale agreement, and is typically based on one (or more) of net assets, net debt (i.e. enterprise value on a cash-free debt-free basis) or working capital of the business, as at the completion date. This is achieved by drawing up a set of completion accounts after the deal has completed, and comparing the completion net assets, completion net debt and/or completion working capital figures within those accounts against pre-determined target figures set out in the sale agreement.

Locked box

A locked box mechanism is a fixed-price model based on a historical set of financial statements. Prior to signing the sale agreement, the parties agree on a fixed purchase price based on an agreed set of historical financial accounts of the target business (locked box accounts). While there is no post-completion adjustment to the agreed purchase price, provisions in the sale agreement protect the buyer against "leakage" (i.e. any unauthorised transfer of value from the target business to the sellers or their related entities) between the locked box date (i.e. the date to which the locked box accounts have been prepared) and completion of the sale.

Choosing the right purchase price adjustment mechanism when selling your business is complex and can often feel overwhelming. It's important to have a strong team of legal and financial/accounting advisers to help guide you through this process.

You can find more information about these considerations here, including a discussion of the advantages and disadvantages of both mechanisms.

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What is my main exposure to the buyer once I've sold my business? How can I mitigate that exposure?

As a seller, the main exposure you will have to the buyer after completion of the sale will be through the warranties and indemnities in the sale agreement.

Warranties are statements of fact regarding the state of affairs of the target business, including its assets, liabilities and operations. They are typically given at the time of entry into the sale agreement and repeated at the time of deal completion. They are designed to protect the buyer against risks or issues relating to the target business that are "unknown" or have not otherwise been disclosed.

Importantly, the seller should only be giving warranties in respect of the state of affairs of the target business under its ownership. In other words, it's not market practice in Australia for the seller to warrant anything that is forward-looking or otherwise relates to the future condition or performance of the target business.

Some customary "categories" of warranties include the following:

Title and capacity warranties

Warranties relating to the seller's power and capacity to enter into and be bound by the sale agreement, its title to the relevant assets being sold (e.g. shares for a share sale), and its ability to sell those assets free from any encumbrances or other third-party interests.

Other fundamental warranties

These include warranties relating to the ownership structure of a target corporate group or the ownership of certain intellectual property, such as for a target business whose primary asset is a technology platform.

Business warranties

These are the main warranties relating to the target business and its assets, liabilities and operations, and typically cover matters such as accounts, contracts, real property, intellectual property, information technology, privacy, corporate matters, employment, litigation, compliance with laws, authorisations, solvency, insurance and information disclosed to the buyer.

Tax warranties

Warranties relating to the tax affairs of the target business.

Because warranties relate to "unknown" risks or issues, it's customary for the seller's liability under the warranties to be limited in various ways. Some examples of customary limitations of liability include the following:

Disclosure shield

Information that has been "fairly disclosed" to the buyer as part of the due diligence process typically provides a "shield" to the seller against its exposure to the buyer under certain warranties in the sale agreement. In other words, if the seller has been transparent with the buyer and "fairly disclosed" information to the buyer prior to entry into sale agreement, the buyer is deemed to be "on notice" of such information and cannot make certain warranty claims against the seller in respect of matters to which such information relates.

Knowledge shield

Information which certain buy-side executives know (or ought reasonably to know) often provides a "shield" to the seller against exposure to the buyer under certain warranties in the sale agreement. In other words, if the buyer is aware of a risk or issue with the target business and hasn't otherwise protected themselves against that risk or issue through other contractual mechanisms in the sale agreement, then the principle of "caveat emptor" applies, such that the risk or issue is one that should be borne by the buyer.

Financial thresholds

There is often an individual claims threshold ("de minimis") and an aggregate claims threshold ("basket") which must be satisfied before the buyer can bring certain warranty claims against the seller. This protects the seller against the buyer bringing certain low value, cost ineffective warranty claims against the seller.

Maximum liability caps

There are often maximum liability caps for certain warranty, indemnity and other claims against the seller under the sale agreement, which are typically set at a negotiated percentage of the purchase price.

Time limitations

Time periods exist within which the buyer must bring certain warranty, indemnity and other claims against the seller under the sale agreement.

There are many other general limitations, qualifications and exclusions that should also be included in the sale agreement for the seller's benefit. As this is a significantly technical part of the sale documentation, it's important to have the assistance of an experienced team of lawyers.

Indemnities

Indemnities are also an important head of exposure for the seller under the sale agreement. An indemnity is a contractual promise by the seller to compensate the buyer for loss suffered by the buyer (or the target business under the buyer's ownership) in connection with the occurrence of a specified event relating to the seller's period of ownership.

Indemnities are designed to protect the buyer against risks or issues relating to the target business that are "known" but have not yet crystallised into an actual loss. Accordingly, indemnities compensate the buyer on a "dollar-for-dollar" basis if the specified event the subject of the indemnity occurs and the buyer (or the target business under the buyer's ownership) suffers loss. The two most common types of indemnities in a sale agreement are:

Tax indemnities

For a share sale, the parties often agree that the seller should be responsible for all tax liabilities of the target business that relate to the period before completion of the sale.

Specific indemnities

If the buyer, during due diligence, identifies certain risks or issues relating to the target business that have not yet crystallised into an actual loss, they may seek to protect themselves in the sale agreement by including a "specific indemnity" against that risk or issue. For example, if there is an outstanding piece of litigation, claim or dispute against the target business that has not yet been resolved, or if there are concerns that the target business has not paid its employees in accordance with their legal entitlements, then the buyer may seek specific indemnity protection against those issues.

Because indemnities relate to "known" risks or issues, they are not typically subject to the same limitations of liability (for the seller's benefit) as warranties. For example, the disclosure shield, knowledge shield and financial thresholds (summarised above) do not typically apply to indemnities.

As a founder seller, you can mitigate your exposure to the buyer under the warranties and indemnities in the sale agreement in the following ways.

Read the negotiated suite of warranties and indemnities in the sale agreement, understand your exposure to the buyer under those warranties and indemnities, and seek legal advice from a reputable, specialist corporate/M&A lawyer.
Make use of the disclosure shield. Be transparent with the buyer about the state of affairs of the target business under your ownership. Hiding risks or issues increases your exposure to the buyer under the warranties, may result in a breach of the information warranty (which is a customary warranty relating to the quality and sufficiency of information disclosed to the buyer during the sale process) and, depending on the circumstances, may actually neutralise the benefit of your limitations of liability under the sale agreement.
Consider implementing warranty and indemnity (W&I) insurance as a feature of your transaction. W&I insurance "de-risks" the seller's exposure to the buyer under the warranties (and often the tax indemnity) in the sale agreement, by virtue of the W&I insurer "stepping into the shoes" of the seller for the purposes of certain warranties and indemnities that are "insurable". To understand more about W&I insurance, including the potential benefits and risk structure, please see our detailed article here.

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Will I be prevented from working in the industry once I've sold my business?

In a sale agreement, it's customary for a buyer to seek to protect the goodwill of the business it has just bought by requiring the selling shareholder/s to be bound by certain restraints of trade.

There are two main types of restraints: non-compete, and non-solicit restraints.

Non-compete restraints prevent the selling shareholder/s from engaging in, or being involved with, a business or an activity that competes with the target business.

Non-solicit restraints prevent the selling shareholder/s from soliciting or poaching clients, customers, suppliers, employees and other staff of the target business.

Restraint clauses are generally drafted so that the restraints operate within a specified geographic area and for a specified period of time. Those areas and time periods then typically "cascade" down to more narrow areas and time periods, so that, if the broader areas and time periods are found by a court to be unenforceable because they go beyond what is reasonable to protect the buyer's legitimate business interests in the circumstances, then the narrower areas and time periods will apply.

There are a number of exceptions to the restraints, for example:

if the selling shareholder/s are to receive "scrip" in the buy-side vehicle as part of their consideration for the sale, then it will be important to specify that the restraint covenants should not prevent the selling shareholder/s from holding such "scrip"
if one or more founder sellers are to remain employed or engaged in the target business after completion of the sale, then it will be important to specify that the restraint covenants should not prevent such persons from working for the target business or the buyer after completion.

If the selling shareholder/s are exiting the target business completely once the deal is done, the buyer will be particularly focussed on ensuring that the selling shareholder/s do not "set up a competing shop" after deal completion and thereby erode the value of the business that the buyer has just paid good money for.

Serial entrepreneurs and other exiting shareholders should take note, and consider what businesses or activities they are or may become involved with during the restraint periods, to ensure they are not "tripped up". This is particularly important if the selling shareholder/s wish to remain working in the same or a similar industry as the target business, but not for the target business itself or the buyer, after deal completion.

Restraint clauses are often drafted broadly and in the buyer's favour, to prevent the selling shareholder/s from structuring or engineering their activities around the prohibitions. Therefore, if selling shareholder/s wish to ensure that certain current or future activities are not inadvertently captured by the restraints, in circumstances where they shouldn't be as those activities do not compete with the target business or otherwise undermine its goodwill, then it's important to specifically call these out as "permitted activities" (as further exceptions to the restraints).

These are all tricky considerations, so it's important to have a strong team of lawyers by your side to help you understand and navigate them.

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