What Happens After I Complete the Sale of My Business?

Selling your business is a major milestone, but the process doesn’t always end on the completion day. Even after transferring ownership to the buyer, you may have ongoing obligations to fulfil and legal matters to address. This article will guide you through the essential steps you need to take as a seller after the business sale is complete, ensuring a smooth transition and minimising potential issues.

Fulfilling Post-Sale Obligations

Even after the completion of the sale of your business, you may have certain lingering responsibilities as outlined in the sale agreement. These obligations typically aim to ensure a smooth transition for the buyer and can involve various aspects of the business.

Training and Handover

A common post-sale obligation for sellers is to provide training and support to the buyer during the initial stages of their ownership. This can range from basic familiarisation with day-to-day operations to more specialised instruction on unique aspects of the business. For example, if you sold a software company, you might be required to train the buyer’s team on using your proprietary software or provide guidance on managing client relationships. The extent of training and handover will usually be specified in the agreement, outlining the duration, format (in-person or online), and specific topics to be covered. In some instances, the seller may enter into a formal employment or consultancy arrangement with the buyer to provide ongoing support beyond the initial handover period. These arrangements should be clearly documented, outlining the seller’s role, responsibilities, remuneration, and duration of the agreement.

Meeting Earn-Out Requirements

In some business sales, the final purchase price may be partially contingent on the business’s future performance. These arrangements, known as earn-outs, often involve additional payments to the seller if the business achieves specific financial targets within a defined timeframe. For instance, consider a situation where you sell a retail business with an earn-out provision based on reaching certain revenue goals within the first two years after the sale. Even though you’ve transferred ownership, you may have a vested interest in the business’s continued success to receive the full purchase price. This might involve collaborating with the new owner, offering advice, or even retaining a limited role in the business during the earn-out period, as long as such involvement is consistent with the terms of the sale agreement.

Complying with Restraint of Trade Clauses

When selling a business, it’s common for buyers to include restraint of trade clauses in the business sale agreement. These clauses aim to protect the buyer’s investment by restricting the seller’s ability to compete with the business for a specified period and within a defined geographical area.

For instance, imagine you sell a bakery in Sydney. The restraint of trade clause might prevent you from opening another bakery within a 10-kilometre radius of your previous location for the next three years. These restrictions can extend to various activities, such as:

• Establishing a similar business
• Soliciting clients or customers of the sold business
• Employing staff who previously worked for the sold business

The purpose of these clauses is to prevent the seller from using their existing knowledge, customer base, or industry connections to undermine the buyer’s new venture. The enforceability of restraint of trade clauses depends on several factors, including their reasonableness in terms of duration, geographical scope, and the specific activities being restricted. Courts will generally uphold restraints that are deemed necessary to protect the buyer’s legitimate business interests without being overly burdensome on the seller.

It’s crucial for sellers to carefully review and understand the implications of any restraint of trade clauses before signing a sale agreement. Once the sale is completed, it’s essential to strictly adhere to these provisions to avoid potential legal disputes.

Winding Up or Deregistering Your Company

After selling your small business, you might be wondering what to do with the company itself, especially if it no longer holds any operating assets. In Australia, you have two main options: deregistration or winding up.

Deregistration

Deregistration is a simpler process that allows you to formally close down your company with the Australian Securities and Investments Commission (ASIC). This option is suitable if your company meets certain criteria, including:

• All shareholders agree to deregister
• The company is no longer conducting business
• The company’s assets are worth less than $1,000
• There are no outstanding liabilities, such as unpaid debts or employee entitlements
• All fees owed to ASIC have been paid
• The company is not involved in any legal proceedings

If your company fulfils these requirements, you can apply for deregistration through ASIC’s online portal. The process involves completing a form, providing supporting documentation, and paying a fee.

Winding Up

Winding up, also known as liquidation, is a more formal process that involves appointing a liquidator to oversee the closure of your company. This option is generally chosen when a company doesn’t meet the criteria for deregistration or has more complex affairs to settle.

For instance, consider a situation where your company holds assets worth more than $1,000 or has outstanding debts to resolve. In this case, winding up would be the appropriate course of action. The liquidator’s role is to collect the company’s assets, pay off creditors, and distribute any remaining funds to shareholders before formally closing the company. Voluntary winding up is typically initiated by a shareholder resolution.

Financial and Legal Wrap-Up

After the sale is complete, the seller must address various financial and legal matters to ensure a smooth transition and minimise any potential issues. This includes ensuring all outstanding debts and liabilities are settled, managing any tax implications, and releasing personal guarantees.

Settling Outstanding Debts and Liabilities

The seller is typically responsible for resolving any remaining debts or liabilities associated with the business. This may involve paying outstanding invoices to suppliers, settling loan repayments, or finalising employee entitlements. To ensure a clean break, it’s crucial to thoroughly review the company’s financial records and work closely with accountants to identify and address any outstanding obligations.

For example, consider a situation where a small business owner sells their retail shop. They may have outstanding invoices to suppliers, a loan for inventory, and accrued vacation time for employees. The seller needs to ensure that all of these are settled before finalising the sale.

Managing Tax Implications

Selling a business often triggers tax implications for the seller. Understanding these implications and working with tax professionals is crucial. The seller may need to file a capital gains tax return to report any profit from the sale and potentially pay taxes on the gain. However, there may also be tax concessions or exemptions available depending on the specific circumstances of the sale and the seller’s overall tax situation.

For instance, the Small Business Capital Gains Tax Exemption allows eligible sellers to exclude up to $1 million of capital gains from the sale of their business. It’s essential to explore these potential benefits and plan for tax implications before the sale.

Obtaining Release from Personal Guarantees

In some instances, business owners might have provided personal guarantees for loans or leases taken out by the business. These guarantees mean that if the business defaults on its obligations, the lender can pursue the owner personally for payment.

To protect themselves after selling the business, sellers should seek a formal release from these personal guarantees. This usually requires working with the lender and potentially paying off any outstanding debt or negotiating a revised arrangement.

Conclusion

Selling a business is a significant undertaking. While the completion of the sale marks a significant milestone, it is crucial for sellers to understand and address the various obligations and legal matters that may remain.

Successfully navigating post-sale responsibilities, whether it’s training the buyer, complying with restraint clauses, or managing financial and tax implications, can ensure a smoother transition and minimise potential issues for the seller in the long run.

Frequently Asked Questions