Selling or buying a business: asset sale or share sale?

Forthose old enough to remember:

Iliked the [business*] so much, I bought the company! ×

*Ok,it was the shaver, but you get the idea – is selling or buying the business assetsthe best way forward or should a share sale be considered instead?  There are of course benefits and pitfalls ofboth, and the circumstances of the business sale should be considered carefullyto ascertain the best way forward.  

Summaryof the benefits and pitfalls of Share Sale v Asset/Business Sale

SHARE SALE Benefits Pitfalls Seller Buyer Seller Buyer Overall an easier process
Business as usual. The only change is to the directors and shareholders of the
company

Usually required to provide extensive warranties and indemnities required from the buyer because the buyer is taking the company with all its history and liability Higher risk as taking on all the liabilities of the company, both past and future including tax liabilities Potentially better tax outcomes including small business CGT concessions Employees continue as is, keeping their entitlements & conditions Important to make it clear what assets if any are excluded from the sale. For example, any vehicles? Potentially taking on employees that the Buyer doesn't want Save time and effort as no need to transfer supplier contracts to buyer (nor obtain consent, unless contracts contain a change of control clause or a specific clause requiring consent) No transfer duty payable on a share purchase Must ensure that pre-emptive rights are dealt with first or waived prior to offering the shares for sale Increased due diligence Any registered trademarks or other IP - no need to notify a change of ownership Releases of securities. High likelihood buyer will require all PPSs to be released Taking on any existing and future disputes against the company Subject to the terms of the lease, no need to obtain landlord's consent. Notably, the standard REIQ Commercial Tenancy Agreement is silent on change of control by the tenant). However, if there is a guarantee, then approval will be required for a new guarantor to be provided on completion ASSET/BUSINESS SALE Benefits Pitfalls Seller Buyer Seller Buyer Fewer warranties/indemnities are expected compared to share sales Lower risk as only purchasing assets Transferring individual contracts can be time consuming and potentially have an impact on the value of the business Duty may be payable If the seller owns multiple streams/businesses through the one corporate entity, can carve off that business stream without the need to sell the entire company Cherry pick assets (this can include plant, equipment, inventory, property, company name, intellectual property and goodwill) and employees Releases of securities. High likelihood buyer will require all PPSs to be released Third parties (such as landlord, suppliers etc) may refuse consent to assign their contracts to the buyer and/or obtaining that consent might be problematic Ability to retain any goodwill associated with itself as the owner of the business Liabilities remain with the seller and do not transfer to the buyer Liabilities generally stay with the seller Some government licences may not be transferable, and the buyer will need to apply for those If sold as a going concern, no GST payable Important to make it clear what assets if any are excluded from the sale. For example, any vehicles? Dealing with employee contracts & entitlements, the seller will try to pass these onto the buyer as much as possible

Anillustration

Recently,Active Law acted for a client purchasing a Queensland Body Corporate managementbusiness.  Originally, the seller and thebuyer had agreed to proceed by way of an asset/business sale and the seller’ssolicitors supplied a standard REIQ Business Contract on this basis. 

However, this did not consider the type of business being sold and the circumstances surrounding it. There were reasons making it vital to complete the purchase as quickly as possible, therefore, there was the need to find a business transaction lawyer. Being a body corporate management business, it managed a large number of body corporate schemes and this was the fundamental value of the business (and of course why the buyer was keen to acquire it).

Under the Body Corporate legislation, the transfer of the body corporate manager’s engagement requires approval by a resolution of the body corporate committee.  The regulation goes on to specify what the body corporate must have regard to in relation to any proposed transfer and it has 30 days within which receiving that information to decide the application for approval.   

Suffice tosay, the thought of trying to obtain the consent of numerous committees was notvery palatable and of little benefit to the seller or the buyer, in thecircumstances.   To get around this, theparties proceeded with a share sale instead, by the buyer purchasing 100% ofthe shares held in the company. The sellers resigned as directors and the buyerbecame the new sole directory and secretary.  

Not unlike anasset/business sale, the seller was still obliged to ensure that all personalsecurities were released and, as was the case here, any excluded assets, suchas vehicles were transferred out of the company’s name.   

Takeaways

Noneof this is set-in stone and ultimately proceeding with an asset/business saleor share sale can turn on the circumstances and whether you are buying orselling a business, you should seek professional advice to ensure the mostappropriate structure is used to minimise unnecessary complications movingforward.

×VictorKiam’s (CEO of Remington) advertising catchphrase in the 1980s

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Disclaimer - Reliance on Content
The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.