Selling - Contract of Sate to Settlement
- Posted By Andrew Morgan
In this final instalment of the three part series “Selling”, we look at the final stage of the process. The first issue titled “Selling – Enquiry through to Inspection” discussed in brief, the initial part of the selling process with a prospective buyer through to completing the site inspection. The second “Selling – Negotiation through to Contract” looked at the initial offer to purchase, negotiation and Contract preparation to execution. This third and final part of the series considers the management and process of the contract through to settlement.
Moving on from the euphoria of the contract being executed including payment of the deposit by the buyer, what’s next? Sit back and hope all goes through smoothly? Hardly. Now it is time to go to work. Although the buyer will have much of the work to do here, the seller also has contractual and non-contractual obligations to be dealt with. The list can be long, but not difficult to complete.
The broker’s role, in conjunction with both parties, will be to ensure that the buyer and seller are completing what they need to, thereby reducing the risk of deadlines not being met or in the bigger scheme of things, that the contract does not end because of poor decision making, inactivity or mistakes being made. It may only be one small error, lack of action or mis communication that results in a condition date not being met and either party terminates the contract out of panic or an alternative reason.
Managing Contractual Conditions
A contract may be either conditional or unconditional depending on the negotiation process. An unconditional contract will not include any pending conditions whereas a conditional contract will often be subject to the following:-
1. The buyer receiving satisfactory finance approval which most often includes a business and/or property valuation being completed to an acceptable level
2. A financial and legal due diligence being completed to the buyer’s satisfaction
3. A building and pest inspection being completed to the buyer’s satisfaction
All involved in the process will have their own obligations to fulfil. Some may complete their own investigations and requirements such as dealing directly with a financier or alternatively utilising the services of a finance broker. Some may complete their own financial due diligence or employ their Accountant to complete. One may complete a building inspection themselves or employ a builder/inspector. This often depends on the experience, knowledge and history of those involved. Notwithstanding who completes these matters, there is a finite time frame here governed by what is within the contract of sale that each party is bound to.
During and after the conditional period, both the buyer and seller will need to make various application for/or to transfer the relevant utilities, services, licenses, agreements, and leases involved. These may include but will not be limited to accommodation licence, food licence, liquor licence, electricity, communications including telephone numbers, internet, social media, council, gas, pool and fencing, booking system, supplier agreements, equipment leases and/or hire purchase agreements, etc.
In the case of a leasehold sale, the Lessor’s approval to transfer the lease is required. This will include the Lessee being approved by the Lessor as a suitable operator of the business. The buyer will need to provide satisfactory details of their history, experience and financial capacity.
Employees need to be considered by both parties. Often there will be unwarranted concern that the business is being sold and their position and services may no longer be required. In many cases employees are terminated and paid out by the seller at settlement. The buyer can re-employ any or all the employees. In most cases all the employees will be retained/re-employed by the buyer in the first instance. This maintains a smooth transfer from one owner to the next. Either way, communication is required between all parties so that any employees are also communicated with at the relevant time during the process.
Training by the seller for the buyer is an important part of the sale process and is one of the last matters to be dealt with prior to or just after settlement. Depending on the type of business involved, training may be minimal or require an extended period. Motels often include a short training period of typically one day to potentially seven days, in most cases. Businesses within other industries may require months of training and handover. Motel training is often completed before settlement nowadays, although in the past it was not completed until afterwards.
There may or may not be a requirement to count stock. This will depend on the business and how much stock the seller carries. If there is no restaurant involved often stock will be minimal and not require counting. Alternatively, a large stock component can be counted and included within the settlement figures or paid separately by the buyer to the seller.
Settlement
Now that most of the hard work has been completed during the sale process, it is time for the big day… settlement of the contract. At this point the solicitors will finalise the settlement statement including “cheque” directions, transfer documents, etc. The buyer and seller will complete a final inspection, physical handover of keys, etc. The buyer (or their representative) may or may not have moved into the residence. Again, this often happens before settlement now, whereas this was rarely the case years ago. Once the solicitors confirm settlement has been completed, hopefully both parties are happy and excited for the future.
Obviously this is a very condensed version of the process, but summarises the final stages of the journey for the seller and begins a new and exciting adventure for the buyer.