Are you looking to buy a business, or have you signed a contract already? If so, there are key risks and advantages about the structure of the transaction that need to be understood before looking at the detail.
There are many reasons to buy a business. Perhaps you are new business owner and want to takeover a secure client base, proven model, and profitable trading history. Alternatively, you may be an existing business looking to expand into a new market or perhaps even buyout one of your local competitors.
Often the initial enthusiasm for the transaction means that basic choices about the structure of the transaction are overlooked or misunderstood. Here we look at some fundamental distinctions between an Asset Sale and an Equity Sale.
Most business acquisitions take place in one of two ways – you are either buying the business assets directly (an Asset Sale), or you are buying ownership interests (shares for example) in the entity which holds the assets (an Equity Sale – often but not necessarily the Sale of Shares of a company).
We outline some of the major considerations below:
- A Share Sale means that you are taking over the company. This means you also assume all the accrued risk, compliance failures, trading history, tax obligations, debts and claims against the company. Significant due diligence and seller warranties are crucial.
- In an Asset Sale you are purchasing the business assets from the seller only. With some exceptions, this generally means that the liabilities and responsibilities of the seller remain with the seller. An Asset Sale – if handled correctly – means the Buyer can continue the business with a ‘clean slate’ and for this reason it is the most popular mode of purchase for small and some medium-sized businesses.
- Business Asset Sales in Queensland attract stamp duty at a rate depending on the unencumbered vale of the business. Because the stamp duty is based on the value of the business, the stamp duty liability on the sale medium and large businesses can be very significant (up to almost 6% of the business value, including goodwill). Stamp Duty on business assets has been partially abolished in New South Wales and is not payable in Victoria, unless the transaction also involves a transfer of real property.
- Share Sales generally do not attract any stamp duty. However, there are exceptions for shares in some types of companies which hold real property and units in some unit trusts. Accordingly, a Share Sale can avoid a large stamp duty liability which might otherwise be paid in an Asset Sale.
- Sometimes a trading company also owns other personal assets which are unrelated to the business activities, or it may even own multiple businesses. A Share Sales may not be appropriate in such cases.
- The accounting and tax implications are completely different for Share Sales compared to Assets Sales. Personalised tax and accounting advice must be obtained from a qualified advisor.
- Share Sales require very different legal documentation to an Asset Sale. Vendor warranties take a frontline role in Share Sales because the buyer needs confidence that the Vendor will take responsibility for any claims or debts of the company arising prior to sale. On the other hand, Assets Sale agreements are more concerned with identifying and transferring each discrete asset of the business.
There are many other considerations particular to the type of business. Failure to get appropriate legal, accounting and tax advice about the structure of the transaction before you put pen to paper can have huge consequences for the success of the business.
If you are considering purchasing or selling a business, or have any questions about business conveyancing, please contact our office for an obligation free consultation with one of our lawyers.
About the Author
Daniel Dash is part of the commercial law team and has significant exposure working with business owners on a range of matters including business sales, shareholder agreements, intellectual property, litigation and taxation matters.