how to manage a business ownership transfer

How to manage a business ownership

transfer

http://www.jpabusiness.com.au/

jpabusiness.com.au +61 2 6360 0360 2

Table of Contents

Chapter 1: The JPAbusiness Business Transfer Checklist ......................................... 3 What you need to consider in a business transfer .............................................................................. 4 Using the JPAbusiness Business Transfer Checklist ........................................................................... 4

Chapter 2: Business transfer issues – Employees and Financial .............................. 10 Employees ........................................................................................................................................................... 10 Documentation .................................................................................................................................................. 10 Communication ................................................................................................................................................. 11

Financial ............................................................................................................................................................... 12 Employee entitlements ................................................................................................................................... 12 Customer accounts ........................................................................................................................................... 13 Work in progress .............................................................................................................................................. 14 Insurance ............................................................................................................................................................. 14

Chapter 3: Business transfer issues – Customers, Suppliers and Stock ................... 15 Customers ........................................................................................................................................................... 15 Suppliers .............................................................................................................................................................. 16 Relationships ...................................................................................................................................................... 16 Supplier accounts ............................................................................................................................................. 17

Stock ...................................................................................................................................................................... 18

Chapter 4: Business transfer issues – Legal and Other ........................................... 19 Legal ....................................................................................................................................................................... 19 Loans and leases on P&E ............................................................................................................................... 19 PPSR ....................................................................................................................................................................... 20 Registrations and roadworthiness certificates ................................................................................... 20 Transferring a premises lease ..................................................................................................................... 21

Other ...................................................................................................................................................................... 22 Don’t wait – plan ahead ................................................................................................................................. 23

Disclaimer: The information contained in this eBook is general in nature and should not be taken as personal, professional advice. Readers should make their own inquiries and

obtain independent advice before making any decisions or taking any action.




Chapter 1: The JPAbusiness Business Transfer Checklist

Comments by James Price JPAbusiness Pty Ltd

This eBook was prompted by a recent experience I had while conducting due diligence for a client.

My client was in the process of purchasing a building products business in Queensland, which sells to both the trade market and retail customers.

Contracts had been exchanged and a deposit paid by my client, but the sale was subject to the outcome of my due diligence.

While sitting down with the vendor and their staff and talking about the information I required, they said:

“We’re supposed to be settling on this business next month, subject to your due diligence, but no one has talked to us about what sort of things we need to get ready to make the transition and sale happen.

“We’re all flying blind and have no idea how this is going to come together.

“We have accounts, we have customers, we have creditors, we have stock – how is the physical transfer of ownership and management going to happen? We’re worried it’s going to be a mess.”

My response was:

“Well, if you had a good business broker they would have prepped you on the things you need to think about.”

I then offered my own suggestions for what they could do to get themselves prepared, all the while thinking: ‘There’s an eBook in this!’




What you need to consider in a business transfer

I really felt for this vendor because they were in a situation where things were moving in the right direction for them i.e. they had received a full deposit from my client and had a contract, but it was all in danger of running off the rails due to their complete lack of preparedness for handover.

Of even greater concern for me was the impact that might have on my client, the purchaser.

The last thing I wanted was a handover whereby the business performance was negatively impacted by transfer issues not planned out ahead of time and dealt with appropriately.

There are several important issues a vendor and, by definition, a purchaser need to consider and deal with in the transfer process leading up to settlement. There is quite a bit of interplay and overlap between the issues, but for the purposes of this eBook I have separated them into seven categories:

• Employees • Financial • Customers • Suppliers

• Stock • Legal • Other

Using the JPAbusiness Business Transfer Checklist

We have created the JPAbusiness Business Transfer Checklist based on the seven categories listed above.

The checklist is designed to help vendors ensure they have gathered all the information needed for a smooth transfer process. It can also be used by purchasers as a checklist of issues that need to be settled before handover.

You can use the checklist on the following pages or download a copy from our website.



http://www.jpabusiness.com.au/e-book/jpabusiness-business-transfer-checklist

http://www.jpabusiness.com.au/e-book/jpabusiness-business-transfer-checklist


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JPAbusiness"Business"Transfer"Checklist"here are numerous important issues a vendor needs to consider and deal with in the transfer process leading up to a business sale settlement. These issues include staff entitlements and employment contracts, managing key customer and supplier relationships and communication,

transfer of registrations and insurances on P&E, work in progress, final stocktake and premises lease transfer.

The JPAbusiness Business Transfer Checklist is designed to help vendors ensure they have gathered all the information needed for a smooth transfer process. It can also be used by purchasers as a checklist of issues that need to be settled before handover.

Keep in mind that not all of the issues and actions listed will apply in all business handover situations, as the specifics of your transfer will depend on your business and the sale contract terms and conditions.

T

Business'sale''

transfer'issues' Actions'

Employees" '

Documentation Sale type – Company shares:

• Collate existing employment agreements ! • Check if any employees do not have formal employment

instruments i.e. contract or letter ! • If so, provide affected employees with contract or letter

and ensure it is processed prior to completion !

Sale type – Going concern assets:

• Ensure purchaser has opportunity to provide employees with new letters or contracts of employment !

Communication Determine a schedule for communicating sale plans and processes to employees !

Set up meetings between key employees and purchaser !





Business'sale''

transfer'issues'

Actions'

Financial

Employee entitlements Seek advice from your solicitor on what information they require regarding amounts of annual leave, sick leave, long service leave etc. accrued by each employee !

Provide information to your solicitor in timely fashion so contract can be written !

Provide updated staff entitlements information to solicitor at completion !

Customer accounts Work with purchaser – prior to completion – to agree on plan to communicate new account details to customers !

Work in progress Work with your solicitor and broker to develop a work-in-progress schedule to be assessed upon completion !

Insurance Ensure you have adequate business, P&E and building insurance up to completion, and for an appropriate time afterwards !

Ensure purchaser has relevant insurances in place before cancelling your policies !

Customers

Relationships Determine a schedule for communicating sale plans to key customers !

Work with purchaser to plan out a contact program of meetings and greetings with key customers ahead of completion date !





Business'sale''

transfer'issues'"

Actions'

Suppliers

Relationships Determine whether purchaser wishes to be introduced to suppliers prior to completion !

Determine a schedule for communicating sale plans to key customers !

Work with purchaser to plan out a contact program of meetings and greetings with key suppliers !

Supplier accounts Work with purchaser to agree on date at which they will take responsibility for supplier accounts !

Advise suppliers of completion date and end of your account obligations !

Stock

Stocktake Begin conducting pre-stocktakes once you make the decision to sell your business !

Work with purchaser to agree on time of stocktake and how it will be conducted !

Seek your business broker’s assistance in conducting the stocktake !





Business'sale''

transfer'issues"Actions'

Legal

Loans and leases on plant and equipment (P&E)

Collate all existing P&E loan and lease documentation !

Pay out any outstanding loan and lease obligations prior to completion !

Personal Property Securities Register (PPSR)

Check whether there are any PPSR registers on your P&E (your solicitor can assist here) !

If any registers exist, ensure they are removed prior to completion !

Registrations and roadworthiness certificates

Transfer registrations and insurances on P&E to purchaser prior to completion !

Check that all P&E has necessary roadworthiness certificates, industry certificates, etc. !

If any certificates missing, ensure they are obtained well prior to completion !

Premises lease Provide premises lease documents to purchaser !

Work with purchaser and relevant solicitors/advisors to ensure lease is ready for transfer at time of completion !





If you would like to learn more about the business broking and advisory services offered by

JPAbusiness, please contact the team on 02 6360 0360 or visit http://www.jpabusiness.com.au

Please"feel"free"to"post"this"template"on"your"blog,"or"email,"tweet"and"share"it"with"your"network.""

Business'sale''

transfer'issues'

Actions"

Other

Logos and marketing material

Provide purchaser with access to electronic and hard copy versions of logos and other marketing material at completion !

Logins and systems access Provide purchaser with access to computer and security systems at completion !

Software licences Ensure licences for all software used in business operations are transferred to purchaser at completion !

Prepaid advertising Provide documentation to your solicitor and purchaser showing contracted advertising period and amount prepaid !

Agree a timeframe with purchaser/advisor for any outstanding liability to be transferred to purchaser !

Other prepaid expenses Provide documentation to your solicitor and purchaser showing details of prepaid expenses !

Agree a timeframe with purchaser/advisor for any outstanding liability to be transferred to purchaser !





Chapter 2: Business transfer issues – Employees and Financial Comments by James Price JPAbusiness Pty Ltd

Employees

There are a number of business transfer issues related to employee management and two of the most important are:

• Documentation • Communication.

Documentation

It is important for a new owner to ensure the tenure of employees staying within the business. To do that the relevant documents must be provided to employees and duly executed in the lead-up to completion.

The actual documentation required will depend on what type of sale is occurring. For instance, if the shares in a company are being sold then the employees will usually transfer under their existing employment agreements, provided there is no requirement for these agreements to be refined as part of the sale terms.




However, if the transaction is a going concern asset sale, the vendor is effectively terminating the employment of those people, and the purchaser will need to lodge a fresh letter of employment or employment contract with each employee.

Sometimes we find the employees of a business don’t have any employment instrument in place – no contract and no letter – and have been employed on the basis of a verbal agreement. A purchaser coming in may want to formalise that situation.

In this situation there needs to be correct documentation in place on day one of the new business so, again, the relevant documents must be provided to the employees and completed prior to settlement.

Communication

For employees moving to the new ownership, as well as employees not required by the new owner, there needs to be a clear communication process.

Our vendors are often quite sensitive about when they communicate to their staff about a business sale. Some communicate very early on – even before they have a purchaser in mind. Others leave it until very late in the process when they have binding contracts in place.

There is no right or wrong, but the important thing is that once they decide the time is right to share the news with employees they do so openly.

They need to be transparent with their employees about what they can expect from the process, introduce them to the purchaser and involve the purchaser in discussions with employees (in a structured way) leading up to settlement. This will keep the employees in the loop regarding the transfer process and reduce nervousness about the new working environment.

Obviously change is challenging for everyone, but there needs to be a warm handover of employees. The last thing both a vendor and purchaser wants is unsettled and unproductive employees.




Financial

There are four main issues to consider in this category:

• Employee entitlements • Customer accounts • Work in progress • Insurance.

Employee entitlements

It is important for both the vendor and purchaser to have a clear understanding of the entitlements associated with each employee who is either leaving the business upon settlement, or going forward with the new ownership.

Entitlements are usually to the vendor’s account, so they’re paid by the vendor up to completion or settlement, or the value is adjusted from the settlement proceeds.

Vendors will need to inform their solicitors of the amount of annual leave, sick leave, long service leave and the like that has been accrued by each employee. There is then a financial process under which those either get paid out or adjusted from the purchase price, or both.

If you as a vendor have a good solicitor putting the contract together for you, they will ask for the entitlements owed to staff at that point. You will then to update them at the completion date, once it is identified.




Customer accounts

Another financial issue is the payment of accounts by customers.

The last thing we want to see post-completion is money paid against invoices you have issued as a vendor leading up to completion, going to the purchaser’s account.

Equally the last thing we want to see is the first month of invoices issued by the purchaser being paid to the vendor’s account.

I have experienced situations of how not to do it, where that has happened for a period of six or 12 months post a completed sale on a business. It is disastrous because there is money changing hands behind the scenes, going backwards and forwards between accounts, and it takes a lot of work to unpick it all and keep track.

To avoid this situation the vendor and purchaser need to work closely, ahead of the completion date, to decide how you’re going to communicate the new arrangements to the business’s customers.

That may require repeated communication, both in writing and by telephone, to ensure customers appreciate there is a new account into which they must pay their bills after a certain date.




Work in progress

Where a business has jobs and projects that may stretch across the completion date, work in progress will need to be assessed and determined upon completion.

Unless a sale contract determines otherwise, work in progress for a job or project that runs through the sale date needs to be fairly apportioned to the vendor and purchaser commensurate to the amount of work each party has or will have to expend on the project.

There can be significant dollars involved in work in progress and normally these are adjusted in the favour of either the purchaser or vendor, depending on the status of the individual project or job.

A good solicitor and broker will assist you as a vendor develop a work-in-progress schedule to be assessed upon completion, so a fair apportionment can be agreed between the parties.

Insurance

As a vendor you want to ensure you’re well and truly covered by insurances – business, plant and equipment, and building – right through to completion.

It’s equally important to ensure the purchaser is covered right from completion, so no gap can occur which could give cause to later dispute if something adverse did happen during that handover period.

A sound strategy as a vendor is to ensure there is a modest insurance overlap, just to cover any contingencies.




Chapter 3: Business transfer issues – Customers, Suppliers and Stock Comments by James Price JPAbusiness Pty Ltd

Customers

We talked earlier about the financial issues related to customers, but there is a separate issue regarding customers and that is ‘relationships’.

A business may have 50 regular and loyal customers and yet 15 of those may represent 60% of the sales on a regular basis.

The vendor needs to think about how they transfer those relationships to the purchaser.

The vendor may think:

“Why do I need to bother about that? I had to establish those relationships myself; the new purchaser can look after their own relationships.”

The vendor will find, however, that the new purchaser will be anxious to establish those relationships as it’s for the good of the business that they are established early.




A vendor who shows a willingness to facilitate these meetings and relationships will also place themselves in good stead with the purchaser, which all goes to supporting a successful sale.

Best practice is to plan out a contact program of meetings and greetings ahead of the completion date, even if the actual meetings may not occur until post-completion.

As well as keeping the purchaser happy, it means key customers are given a heads up and there is no chance of their being offended by hearing the news of the business’s sale ‘on the grapevine’.

Suppliers

Again there are several issues to consider here, with the most important ones being:

• Relationships • Supplier accounts.

Relationships

If you rely on suppliers for the products you sell you might have relationships with five, 10 or 20 key suppliers.

It’s important to note that a purchaser coming in will need to establish relationships with those suppliers too. They’ll need to do credit applications and sort out terms, and they’ll need those relationships in place from day one, in order to operate.

It’s likely that as the vendor you will be called on to assist in making those connections.

The question is: when should you as a vendor allow a purchaser to contact your suppliers?




Just as a vendor needs to plan out a contact program of meetings and greetings between the purchaser and key customers, so there needs to be a similar contact program arranged with key suppliers. Again, the meetings may take place after completion but it is important to start the process before completion.

Of course, vendors may experience pressure from the purchaser to introduce them to the top five or 10 suppliers and customers before completion. I’ve had circumstances where that has occurred and in some instances it’s a condition of sale.

This is particularly important where there are formal supply or distribution agreements in place that may need to be assessed in the due diligence process or assigned/transferred as part of the sale process. If that’s the case, then that has be arranged ahead of time.

Ideally vendors need to be careful and ensure they have a strongly binding contract before disclosing the sale process to those key suppliers.

Supplier accounts

As a vendor it is equally important to communicate the news of your sale with your suppliers, once you’re sure of it proceeding.

You will need to advise them of the date of completion and the fact your obligations in terms of orders will end on that date, and the new purchasers’ obligations will start on the next due date.

If that’s not planned out and clearly communicated to suppliers ahead of time you will find there will be a mismatch of accounts and you may be charged for things that relate to the new purchaser.




Stock

When it comes to buying and selling businesses, a lot of money can be made or lost based on your inventory management.

(This is a subject we covered in detail in our blog: Top tips for managing inventory.)

Often businesses are sold subject to a stocktake in the lead-up to or upon completion. Usually stocktakes are held within 24 or 48 hours of completion date.

A stocktake can be quite a significant exercise and there is a lot of value involved. Vendors need to be very planned about how the process will work and they need to include the purchaser in the planning so everyone is clear ahead of time on how it will happen.

A smart vendor will start doing pre-stocktakes to ensure they have their stock lists in order well prior to completion. This will ensure they know where potential slow-moving and obsolete stock might be found, and where there are gaps.

That way, when it comes to settlement, they don’t get any nasty surprises regarding the actual value of their stock at hand, versus what they thought it might be.

A good business broker will offer you as a vendor assistance in planning and running the stocktake to ensure it is appropriately conducted for you, and also to provide the purchaser with confidence it has been robustly undertaken.



http://www.jpabusiness.com.au/blog/posts/james-price/2015/06/07/top-tips-for-managing-inventory

http://www.jpabusiness.com.au/blog/posts/james-price/2015/06/07/top-tips-for-managing-inventory


Chapter 4: Business transfer issues – Legal and Other Comments by James Price JPAbusiness Pty Ltd

Legal

There are many legal issues to consider in a business transaction process and, as we have often said in our eBooks and blogs, engaging a solicitor with experience in business sales is critical.

While your solicitor will be best placed to help you prepare for the legal aspects of a business transfer, one area I would like to highlight here is plant and equipment (P&E).

Legal issues related to plant and equipment include:

• Loans and leases on P&E • Personal Property Securities Register (PPSR) • Registrations and roadworthiness certificates.

Loans and leases on P&E

When purchasing plant and equipment as part of a business sale, it is normal for the purchaser to require all P&E be ‘free of charge’ i.e. that there are no outstanding leases or loans attached to those assets.

That means you as a vendor need to pay out and remove any charges ahead of a completed sale.



http://www.jpabusiness.com.au/blog/posts/james-price/2015/03/08/do's-and-don'ts-of-business-selling

http://www.jpabusiness.com.au/blog/posts/james-price/2015/03/08/do's-and-don'ts-of-business-selling


PPSR

You will also need to ensure those leases or loans have not been registered with the Personal Property Securities Register (PPSR) by the lease or loan company or, if they have, that the register is removed once the charge is paid out.

The purchaser will want to know that all registers, claims and encumbrances are removed prior to or at completion.

Registrations and roadworthiness certificates

While P&E may be free of a charge (owned outright) it will still often have registrations and insurances associated with it, and these also need to transferred.

Specialised P&E may have industry certifications or specifications which will need to be reviewed and verified upon transfer at completion.

A good solicitor acting for you as part of the sale process, along with your broker, will help you arrange for registrations to be transferred, but sometimes this process can take quite a while.

Don't leave it to the last minute!




I have seen business sale settlements held up for weeks because registrations haven’t been transferred, roadworthiness certificates haven’t been obtained or PPSR haven’t been removed.

Careful planning by the vendor, their solicitor and business advisor upfront will avoid that very frustrating scenario.

Know what you have to transfer and work through it with the various groups involved, including the leasing firms, banks, registration body and purchaser.

Transferring a premises lease

Another issue likely to fall in the ‘Legal’ category is the transfer of a premises lease.

If you as the vendor have a landlord and your business premises lease is transferring or being assigned to the purchaser, you will need to allow some time for this process.

Typically landlords have a solicitor or legal advisor operating for them and it will take time for them to transfer and assign your premises lease to another party.




This is because the landlord and their solicitor have to be satisfied that the purchaser has the wherewithal to meet the lease terms and conditions and pay the rental.

The lease has to transfer at the same time as the business transfers upon settlement, so you need to be well planned on this matter if you hope to hit your target settlement date.

As a vendor you are the lease assignee, so you need to assure all the documentation on the lease is provided to the purchaser and their advisors and that you are oversighting that assignment process.

Other

This is a bit of a catch-all area that may include things like logos and marketing material, logins and systems access, licensing for software used in the business, pre-paid advertising, and other pre-paid expenses.

Here are a couple of examples:

Example 1 – You have paid $10,000 for annual Sensis Yellow Pages advertising. You paid it last month and this month you are transferring the business to a new owner. Therefore you have only owned the business for one month out of that 12-month marketing period.

Providing you have covered this issue in the sale contract, you will want to ensure the liability for the remaining 11 months is passed to the purchaser via an adjustment to the purchase price.

The purchaser will require legitimate documentation to show that you’ve actually paid upfront.

If you are paying Sensis by instalments, you need to ensure the account is transferred to the incoming purchaser so you don’t wear those expenses, providing that is also covered in the contract.




Example 2 – You are in your first month of running the business and wish to send out a direct mail communication to all past customers updating them on changes in the business and seeking their feedback.

By ensuring you have ready access to logos and marketing material artwork, you can easily action such a process without delay.

Don’t wait – plan ahead

In the case of the Queensland business vendors mentioned in Chapter 1, they did have a business broker and I believe he would have known what was required for a successful business transfer. He just hadn’t communicated it to his clients.

Perhaps he was thinking “until due diligence is complete and we have a binding agreement from the purchaser, it’s all theoretical”.

In my opinion, however, many of these things take time and are reliant on other people and other organisations, such as lease companies, government bodies and banks, which can be slow-moving.

Whether you have a binding contract or not, it’s wise to plan for your business transfer and set the wheels in motion ahead of time.

This doesn’t mean you as a vendor need to dramatically change the way you run and manage your business during a sale process. It just means asking your broker and solicitor for an early heads-up on what information you will need to gather and then planning accordingly. This will give your business handover every chance to run smoothly.

If you would like to learn more about the business advice, valuation and transaction services offered by the team at JPAbusiness, visit

http://www.jpabusiness.com.au or call 02 6360 0360.



http://www.jpabusiness.com.au/contact-jpabusiness