So you are thinking of selling your business? Below, we share some important considerations from the legal side.

The information that follows is general in nature and does not replace individual advice. Individual advice will properly consider the application of the areas (i.e. tax considerations and legal risks) discussed below and identify other areas that you will need to consider.

PRE-CONTRACTUAL RISK

Your first legal challenge in the sale of the business is to work out how and what information to disclose.

There are both statutory and common law obligations that apply in relation to how you approach disclosure. Your solicitor will be able to advise you on your disclosure obligations.

In some States, you are required to provide particular information in a set form. Generally, the information you do disclose needs to be accurate.

Prospective purchasers are going to want to understand the profitability of your business. Overstating the profitability of a business is a clear risk in terms of breaching obligations with respect to misrepresentation. Australian Consumer Law contains prohibitions against misleading statements, including statements as to future circumstances.

The statutory prohibition on misleading conduct is found in section 18  of the Australian Consumer Law (contained in Schedule 2 of the Competition and Consumer Act 2010 (Cth)):

A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

You can read more about s 18 here.

There are additional sections of Australian Consumer Law that relate to statements about future matters. Remedies under Australian Consumer Law may include:

a. Section 236: Damages;

b. Section 232: Injunction;

c. Section 237: Compensation; and

d. Section 224: Pecuniary penalties.

There are three common law categories of misrepresentation:

a. Innocent misrepresentation:  misrepresentation that is not fraudulent;

b. Fraudulent misrepresentation: where there is:

• Actual dishonesty;
• An absence of belief in the truth of the representation; and
• Reckless indifference as to whether the representation was true or not.

c. Negligent misrepresentation: where there is a duty of care to ensure that information provided was true and reliable.

The remedies available to a purchaser at common law dependent on the type of misrepresentation and may include rescission or damages.

SALE OF SHARES VS ASSETS

One of the first decisions you will need to make is whether to sell the assets or the shares of your business. This decision will be guided by your commercial objectives and the nature of your business.

The sale of 100 percent of the shares in your company will result in a transfer of control of all of the assets and liabilities. From the perspective of the buyer, the purchase of shares comes with additional risks in that all existing liabilities, both known and unknown, will be assumed.

The sale of assets allows for the selection of specific assets and reduces the risk of unintended assumption of liability from the perspective of the buyer.

If you propose to sell the assets of your business, the proper identification, valuation, and transfer of assets will be paramount. The buyer will want to ensure that they are acquiring all of the components that make up the business.

This is part one of a three part series on ‘Selling Your Business.’ If you have any questions on the above, please email us at info@lawquarter.com.au.