After contracts are exchanged, the focus of the parties and their solicitors is on taking the steps required for settlement.

Timing

Settlement should usually be arranged as soon as possible after exchange of contracts, to minimize the chances of problems arising from the vendor’s continuing conduct of the business.

Action plan

An action plan should be prepared, showing what steps are required to be taken and by whom, in order to bring about the settlement. The solicitors for the parties should then work through those steps to achieve the settlement.

Pre-settlement issues

In some states and territories, there may be pre-settlement steps, such as a requirement for the vendor to provide certain forms or notices to the purchaser.

Personal Property Securities Register

Most businesses are subject to security interests registered under the PPSR system. The purchaser will require that these be discharged on or before settlement. If the vendor needs the money from settlement to discharge the securities, this can be handled like the discharge of any other mortgage, where part of the payment of the purchase price is directed to the secured party in return for discharging the security. As the PPSR system is online, and does not rely on paper, the discharge takes the form of the secured party providing the password, known as a “token”, to enable the charge to be removed from the register. However, for securities already registered prior to the PPSR system coming into force in 2012, there is no token, so the secured party generally provides a deed of release and an undertaking to register the release with the PPSR.

Venue for settlement

The settlement will usually take place at the vendor's solicitor's office, although there is no strict rule about this. Some jurisdictions follow the old conveyancing convention that settlement must take place at the site of the deeds, which is often the vendor's bank. In some cases, it may be best to settle at the business premises, because the relevant documents are usually available there.

Payment of purchase price

The convention has been that the purchase price is paid on settlement by bank cheques. However, many purchasers prefer the more modern procedure of paying by bank transfer. This applies especially if the money is coming from overseas. The legal profession has not caught up to this, and using bank cheques is often still the only way to settle, unless arrangements can be made with banks to arrange instant transfer of funds.

Transfer of shares

Where the transaction is a sale of shares in a company conducting the business, the settlement will usually include:

• transfer of vendor’s shares; and

• replacement of the directors and secretary.

These steps require preparation of documentation including:

• consent of the new directors and secretary;

• minutes of meetings of directors and, possibly, shareholders; and

• ASIC Form 484.

See Arranging settlement.

There may be many adjustments required on settlement relating to:

• vendor’s liabilities, which the purchaser will be assuming, such as rent and employee entitlements; and

• vendor’s assets, from which the purchaser will be benefiting, such as stock and work in progress.

Tax on adjustments

Where the purchaser will be paying a liability to which the vendor should contribute, there is an adjustment on settlement. In effect, the purchase price is reduced by the amount of that contribution.

The purchaser will receive a tax deduction for the whole of that liability, but will not be taxed on the benefit it receives by way of the allowance on settlement. In those circumstances, the vendor may seek to have the amount to be paid to the purchaser reduced to the after-tax amount of the purchaser’s liability.

Post settlement adjustments

Many adjustments cannot be calculated on settlement, as the amount of the relevant liability is not known at that time. This should be covered by clear contractual provisions, stating that any such adjustment should be made as soon as possible after it is able to be calculated.

Debts owed to the business

It is almost universal for contracts for sale of business to state that the debts of the business continue to belong to the vendor after settlement. In the period following settlement, as those debts are paid, the vendor may issue invoices to the same customers in respect of goods or services provided after settlement. This can raise the following issues:

• If a debtor who owes money for both pre and post settlement invoices and makes a part payment, which invoices should this be applied to? The solution is for a contractual provision stating that any payments are applied to the oldest invoices first.

• If both the vendor and the purchaser are chasing the same customers for payment, this can cause ill-will and confusion. This issue may be solved by a contractual provision stating that the purchaser is to collect all of the payments, and then account to the vendor for the vendor’s entitlements upon receipt.

See Adjustments on settlement.

On settlement, the purchaser should be credited for any entitlements of the transferring employees. This includes:

Salary

This is where employees may be entitled to payment after settlement, for a period commencing before settlement.

Superannuation

Any unpaid superannuation accrued prior to settlement should be adjusted, like any other outgoing of the business.

Annual leave

The purchaser is only liable for annual leave accrued before settlement if it “recognises” the employees’ service with a vendor. This is covered by ss 22(5) and 91 of the Fair Work Act 2009 (Cth) (FWA). Otherwise, the vendor has to pay out the accrued annual leave on settlement.

Financially, this makes no difference to the vendor. If it does not pay the employees, it will have to allow the same amount to the purchaser as an adjustment on settlement.

However, it is better for the purchaser to recognise and assume liabilities for these entitlements. It means that the purchaser will receive a cash adjustment on settlement, but only has to pay the liabilities as the employees take holidays or leave their employment. The employees will also generally be happier, taking holidays in the usual way, rather than having them cashed out on settlement.

Redundancy pay

Businesses with more than 15 fulltime employees are exposed to paying employees who are made redundant, based on their years of service. Under ss 22(5) and 122 of the FWA, if the purchaser “recognises” the employees’ services with the vendor:

• the employees who continue with the business are not considered to be redundant; and

• the calculation of any redundancy pay the purchaser may have to pay in the future will include the period of service with the vendor.

In most cases, the contract should provide as follows:

• The purchaser recognises the transferring employees’ service with the vendor. This avoids the vendor having to pay redundancy pay for those employees on the sale of the business.

• There is no adjustment on settlement because the entitlement to redundancy pay may never eventuate.

Long service leave

Entitlements to long service leave (generally arising under state legislation) require careful review and apportionment. The purchaser is likely to be liable for long service leave accrued before settlement under the employees’ service with a vendor. The vendor generally cannot cash out the accrued long service leave on settlement.

See Adjustment of employee entitlements.