By Jackson McKinley
When it comes to selling a business, a vendor’s job does not end once they sign a contract. Often, vendors will have several legal obligations to fulfil until settlement to ensure a smooth and lawful transaction.
Provide accurate and complete information
Vendors are required to give purchasers accurate and comprehensive information about their firm. Financial accounts, contracts, leases, licences, permits, and other pertinent papers may all be included in this information. Such information must be delivered promptly and without any misrepresentations or omissions that might mislead the buyer.
Obtain necessary approvals and consents
Vendors must also obtain any necessary approvals and consents required for the transfer of the business, such as from landlords, suppliers, or regulatory bodies. They must ensure that all contracts and agreements related to the business are properly assigned or terminated before settlement. Vendors have obligations to notify ASIC and obtain consent to transfer any lease or property ownership.
Maintain the business until settlement
Vendors have a duty to maintain the business until settlement and ensure that it continues to operate in the ordinary course of business. They must not take any actions that could materially affect the business or its value, such as selling assets, entering into new contracts, or terminating employees, without the buyer’s consent. The High Court recently held this obligation extends to continuing to operate the business according to the law and that this obligation continues even if the law suddenly changes.[1]
Cooperate with the buyer’s due diligence
Buyers have the right to conduct due diligence on the business before settlement to ensure they are making an informed decision. Vendors must cooperate with the buyer’s due diligence by providing access to their business premises, employees and associated records. This includes answering any questions the vendor may have truthfully and promptly. Most contracts will also have a training period and the vendor will need to assist the purchaser in being trained in the business.
Comply with the contract terms
Vendors must comply with the terms of the sale contract; including any warranties, representations, and indemnities provided. Further, vendors must be sure that all outstanding debts and taxes are paid before settlement and that all assets and intellectual property rights are transferred to the buyer.
Restraints on Trade
Finally, a vendor will also have obligations to the purchaser after settlement, most notably by being subject to restraints on trade provisions. Restraints on trade restrict the ability of the vendor to compete with the business or solicit its customers and employees for a certain period of time after the sale. These provisions aim to protect the purchaser’s investment in the business and prevent unfair competition. Restraints on trade can also be intrinsically enforced by other clauses such as non-compete clauses, non-solicitation clauses and confidentiality clauses.
Non-compete provisions in a sale of business contract limit the seller from launching a rival company or working for one within a given time period and geographic region. Non-solicitation clauses restrict the seller for a predetermined length of time from hiring or soliciting workers of the business. The seller is prohibited from sharing sensitive information about the company with outside parties by confidentiality obligations. Trade restrictions’ capacity to be enforced depends on a number of variables, including how rational they are, how long they last, where they apply, and how they affect the seller’s ability to make a living.
Conclusion
Vendors of businesses have several legal obligations until settlement that must be fulfilled to ensure a smooth and lawful transaction. Vendors can minimise the risks and maximise the benefits of selling a business by providing accurate and complete information, obtaining necessary approvals and consents, maintaining the business until settlement, cooperating with the buyer’s due diligence and complying with the contract terms.
Sellers must recognise the importance of seeking legal advice and negotiating the terms of a business sale to ensure that they are reasonable, enforceable, and do not unduly restrict their ability to work or compete. Buyers, conversely, should be certain the restrictions are necessary to protect their investment and are not so restrictive as to deter potential sellers or harm competition in the market. Failure to properly negotiate these terms or fulfil these obligations can result in legal disputes, delays in settlement, or even cancellation of the sale contract.
Foulsham and Geddes notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Foulsham and Geddes are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
[1] Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6.