When you are selling your business, you must decide if you sell the assets of your business or alternatively sell the shares in the company that owns and operates the business.
It is important to understand the differences and what are the advantages and disadvantages of each type of sale.
Careful consideration must be given to which option is the best as there can be significant tax, commercial and legal risks if the wrong decision is made
What is a Business Sale?
A Business Sale is also often referred to as an Asset Sale involves the sale of some or all of the assets owned by the seller to another individual or entity.
Assets which are commonly sold include:
- Buildings
- Books and records
- Client lists
- Contracts
- Equipment
- Goodwill
- Intellectual property
- Machinery
- Plant and equipment
- Stock
After the sale occurs, the seller will retain ownership of the company structure the business operated under.
The buyer will usually not take on any of the liabilities of the business or the seller.
Often the seller may need to terminate the employment of existing employees, and the buyer is at liberty to them re-employ them. Alternatively, the buyer could take on the employees and adjustments are made for any entitlements owed to them such as holidays and long service in the sale contract.
If the business is operating from a premises owned by the buyer, the seller may make it a condition of the sale contract to require the building to be sold as well. Alternatively, if the business is operating from a premises, which is subject to a lease, the sale contract is often subject to either the landlord agreeing to transfer the lease to the buyer or negotiating a new lease with the buyer.
The benefit of a Business Sale is that the buyer is exposed to less risks following completion of the sale contract. The liability of the business will mostly remain with the seller.
What is a Share Sale?
A company is a separate legal entity, and a Share Sale involves taking over the company in its entirety, including all claims, liabilities, risks and obligations by purchasing the shares in the company.
A buyer will generally undertake a significant due diligence process before finalising the Share Sale and will generally require the Seller to provide extensive warranties and indemnities with respect to the Share Sale.
The parties have an obligation to notify the Australian Securities and Investments Commission (ASIC) as to the changes to the company’s ownership structure as well as compliance with the Corporations Act 2001 (Cth).
Advantages and Disadvantages
Business Sale
The advantages for a Buyer are it:
- does not become liable for any liabilities after the Sale
- can choose which assets it wants to purchase
- can select which employees it wants to retain
The disadvantages for a Buyer are it:
- has to negotiate with third parties for the transfer of contracts and leases which a third party such as a supplier, client or landlord who may not agree to or impose onerous conditions on any transfer
- increased stamp duty may be payable for the transfer of any dutiable assets
The advantages for a Seller are it:
- will be required to provide fewer warranties and indemnities
- can exclude any specific assets
The disadvantages for a Seller are it:
- retains the liabilities which remain with it after the Sale
- will have to obtain releases of all security interests which may require paying out funds to secure the Sale
Share Sale
The advantages for a Buyer are it:
- will ensure a company which has significant goodwill and reputation it will remain with that business
- alleviate the need of having to transfer contracts and leases and the time and cost associated with same
- can avoid or reduce stamp duty costs
The disadvantages for a Buyer are it:
- assumes the risk of stepping into the shoes of the company and it will inherit all the risk and liabilities both know an often unknown
- requires the Buyer to obtain third party agreement to any contracts etc where there is a change of control
The advantages for a Seller are it:
- will avoid the need to release security interests
- can lead to a higher return for shareholders if they can access tax concessions
- allow all third-party agreement to remain with the company
The disadvantages for a Seller are it:
- will generally be required to provide extensive indemnities and warranties which will survive the sale
- may have to agree to the Buyer retaining a proportion of the sale proceeds for a period to protect the Buyer from any breach of warranty
- will have to ensure any share transfer policies and pre-emptive rights to shareholders are dealt with
How can FC Lawyers help?
The decision to proceed by way of Business or Share Sale for both parties involved is a critical one and the parties must understand the advantages and disadvantages. Often the priority of one party may not suit the other party, so it is imperative to get expert legal advice.
At FC Lawyers we have assisted thousands of businesses with their needs when selling or buying. Contact our Business and Corporate team to discuss your needs.
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