Buying or Selling a Business? What’s Really Included in the Sale?
One of the most common questions asked by business sellers and buyers is what’s actually included in the transaction. It may seem obvious but when it comes to intangible assets, it’s not always as clear-cut as you may think.
Not only is it important to correctly value goodwill – and you can read about that elsewhere in this issue of the magazine, it is also vital to understand what you are legally entitled to.
Ersel Akpinar, Lawyer and Co-Founder of Lawthentic, says it is often the intangibles that can make or break a business.
“Most business purchasers focus on the hard assets, the tangible assets, things like furniture and equipment, but it’s usually the intangible assets that are worth more. I’m talking about things like intellectual property, IT systems, websites, goodwill and know-how,” he said.
What Can You Learn?
“Every single business is unique, with its own customers, its own systems, even its own industry within an industry. What’s really important is what you can learn from the seller, the intellectual property. The knowledge that the individual has is invaluable and that’s what you want to harness.
“Unless we’re talking about expensive specialist equipment, most assets are easily replaceable. That’s your tables and chairs, tools, computers, even the website to some extent. But let’s say the business has five key customers who have certain needs and like to be dealt with in a certain way. If you don’t buy the intellectual property, that knowledge – and those customers – could go straight out the door.”
Ersel believes this is sometimes the case when somebody buys a business with no experience in that particular industry.
Buying the Goodwill
“A client may have a policy whereby if they don’t give you a purchase order, they will not pay your invoice. What if you didn’t know that? You need to be paid and it could immediately start you off on the wrong foot,” Ersel said.
“The issues which arise in every business sale are unique. Both the seller and the buyer should be completely clear on not only the purchase price but what it includes.
“When you buy a business, you know you are buying the assets but what you’re really buying is its goodwill because you want the customers to keep coming back. You can put a value on this to some extent, by looking at the profit and loss, but many of these intangible assets really are invaluable.”
Ersel stresses the importance of doing due diligence. Find out which assets are included, both tangible and intangible. Check whether the hard assets are owned or leased, if they are free of encumbrances and if they can be transferred.
What’s being Transferred?
“You should also determine the business’s worth; a good business agent can give you an indication of comparable sales. You should also be clear on financial performance, permits and licenses, employment contracts and if it’s a leasehold business, what is required to transfer the lease.”
To ensure a smooth transition between owners, even if you have experience in the industry, it’s wise to also negotiate some form of training and handover agreement.
Inventory is generally considered part of the assets but may or may not be included in the asking price. In most situations, a normal inventory level is included and then, on settlement day, an actual inventory is taken, and the sale price is adjusted up or down.
In truth, there are no standard rules for what’s included, or not included, when you sell or buy a business. The best plan is to enlist the services of an experienced business lawyer, accountant and business agent to be sure you know exactly what you’re getting.
To contact Ersel, phone 0405 227 447, email [email protected] or visit the website at www.lawthentic.com.au
Ersel Akpinar began working in the legal profession in 2000 and has extensive experience across Corporate, Commercial and Property Law, with clients ranging in both in size and complexity.
He has accumulated many professional qualifications over the years, working in a wide range of industries from hospitality and retail to insurance and telecommunications.