April (No. 495)
Essential considerations when selling a wine business
Loretta Reynolds , Thomson Playford
When it comes to selling a winery, there are a host of issues that need to be considered before you sign on the dotted line. Wineries and viticulture businesses often represent years of hard work and dedication, and to ensure you receive maximum benefit from the sale of your enterprise, there are some important considerations that need to be taken into account. Thorough preparation and appropriate legal leg work can help the sale process run smoothly, to the benefit of all involved.
Before placing your enterprise on the market, consider first how you will structure the sale. This means deciding exactly what you are selling prior to entering into early negotiations.
For instance, you may choose to sell the shares in the entity, the whole business, associated intellectual property, or only certain parts of the winery and some machinery.
The value of your business may be tied to some particular items such as a label or logo, a key employee, a key supplier or a distribution arrangement. If these elements cannot be easily transferred then a buyer will not allocate any value to them and the purchase price will be reduced.
Any legal issues surrounding these ‘items of value’ should be identified and considered as a priority. Action such as registering trade marks or formalising employment agreements and distribution arrangements should be undertaken before the sale process commences.
Once you have identified what you want to sell, tax implications and legal considerations will largely determine how you structure the sale.
Purchase price allocation involves determining what monetary value is given to each of the assets being sold, contracts, intellectual property, book debts etc. It is a good idea to employ a lawyer or accountant to help you with this, as this has tax consequences which may be unfavourable.
It is best to complete the structuring early as it will be more difficult to restructure late in the deal, especially if the buyer has had regard to its tax-structuring issues, stamp duty and GST. Incidentally, stamp duty and GST are usually largely the buyer’s responsibility.
Many companies have complicated structures or ongoing issues with litigation, grower disputes, tax office inquiries, difficult licence conditions or enterprise-bargaining discussions outstanding. These may not be material but should be disclosed to the buyer. But even better, get rid of them.
It is in the interests of the seller to disclose everything material about their business – good and bad – to the purchaser to avoid allegations of misrepresentation.
When these issues are dealt with proactively and if possible, cleaned up in advance and presented ‘simply’ they are less likely to concern buyers. If only identified late in the sale process, issues such as these (no matter how small) can provide the buyer with ‘negotiation credits’ to endeavour to reduce the purchase price.
Finding a buyer
Once all the preparation work is done or well under way, the next step is to find a buyer. In the wine and viticulture industry this may well be a neighbour, competitor, customer or supplier. Usually with the help of a financial adviser some brief information about your business will be sent to potential buyers, who will then be required to make an expression of interest in writing. Before providing any sensitive information, it is essential that a confidentiality agreement between the seller and potential purchaser is drawn up and signed. This will assist in preventing any sensitive information about your business being used by someone else for a purpose other than considering whether or not to buy your business. A comprehensive document detailing every aspect of your business and its assets is then often provided to buyers before formal negotiations commence.
Liability considerations are of paramount importance when selling, or purchasing, a wine enterprise.
Right from the start of the sale process your team should be acting to protect you from any potential claims from a buyer. It is important to carefully consider the information provided to any prospective buyer, especially in relation to forecasts. The buyer will want to rely on all information they have been given, so the best way to avoid problems is to control the flow of information via a due diligence exercise.
It is recommended that the following practical steps be taken to minimise potential liability:
- responsibility for liaison with potential buyers be limited to one or two people only
- detailed file notes of telephone conversations and other discussions with any potential buyer be maintained
- copies of all information provided to the potential buyer be retained
- anyone (such as in due course, other employees) who may be in contact with the potential buyer to be informed of the potential exposure for misleading or deceptive conduct
- proactive management of the due diligence process/disclosure of information to the buyer
- careful consideration to the wording drafted in the sale agreement to, in so far as possible, limit the likelihood of recourse to the sellers in respect of contractual liability and misleading or deceptive conduct.
There are several ways to deal with liability issues in connection with the sale. We would seek first to minimise recourse to the sellers as individuals and secondly to protect the sale proceeds received.
Different approaches are available, however, it is important that these be understood and dealt with during negotiations as soon as possible.
From a seller’s perspective, due diligence is about transparency. The seller will be responsible for the liability and cost of running the business until the settlement date. It is important to ensure you are released from liability after settlement with no, or very few, ongoing responsibilities after handover.
Following settlement there may need to be some financial adjustments in keeping with the sale agreement, however, you do not want the purchase price to be clawed back.
When drafting a sale contract, you may wish to include a clause that protects your current employees. This may involve requiring the buyer to offer ongoing employment to current employees on no less favourable terms than they currently receive.
Other issues that may need to be negotiated between you and the buyer include parachute clauses, employee redundancy packages, sick leave and adjustments. The sale agreement should also allow you, the seller, to have access to the business after the sale date, if required, for tax reasons.
Any buyer which has a substantial overseas shareholding may need approval from the Foreign Investment Review Board to proceed with any purchase. Section 50 of the Trade Practices Act, 1974 can also prevent a transaction occurring which may have the effect of substantially lessening competition in the market.
Depending on how the sale is structured there may be various consents or procedures required under the contracts or constitutions of the companies involved and trust deeds.
The sale process can be a very-complicated procedure with costly implications to both parties if it is not managed correctly. It is essential to seek professional advice before commencing negotiations as you may be unaware of the potential liabilities to which you, as the vendor, are exposed.
Loretta Reynolds is a partner at commercial law firm, Thomson Playford. She specialises in mergers and acquisitions, with the wine industry among her focus industries. Loretta can be contacted on (08) 8236 1406.