A Share Purchase
This is based almost entirely on the type of business you are buying, what it does and how it operates.
Company Sale or Share Sale
A Share sale is where the Buyer is purchasing the shares in the company that owns all of the assets. In the small to medium businesses, this is generally recommended if there are a number of specific contracts in place for supply of goods and services or providing services or goods to customers. These contracts may be exclusive in nature and may not be available to a new entity buying the business. The contracts may be for long term purchases and the discounts are an accumulation of years of business to business activity. There may be employment contracts or sub / contractor contracts that would be difficult to renegotiate, be lengthy or difficult to replace. There may be leases on large or expensive equipment that may not be able to renegotiate. The Company to be sold may have a long and successful history and has established itself as a leader in its field. There are a number of reasons why a share sale may be advantagious. However, buying a company by share sale you are also open to any open or hidden problems that may be part vof the historic operations of the company.
A Buyer should investigate the target company as much as possible, seek good advice and due diligence from his advisors, accountant and solicitor. The Buyer should be clear on his intentions with the purchase and remain very involved with the process.
Share sales are not subject to GST or State sales tax, which can save a considerable sum, however it is best to get quotes and keep abreast of professional fees.
What to Consider
With a Share Sale
Continuity of business name: the business is carried on by the same entity with the purchaser stepping into the shoes of the seller thereby reducing the need for costly and time consuming administration matters. In some instances, customers may not even realise there has been a change of ownership.
Employees: usually remain with the entity and purchaser. Apart from possible provisions in the sale and purchase agreement that may provide for redundancy of specific staff or specific benefits to be paid upon change of control of the business, the legal identity of the employer remains the same.
Assignment: prohibitions against assignment may not arise as the contracting party remains the same. This means that it may be easier to sell the shares than re-assign or novate a large numbers of contracts or licences. It is still important to review the terms of these agreements as often they have ‘Change of Control’ clauses which may have implications for the new purchaser.
Tax consequences: there may be franking credits, tax losses or undisclosed tax liabilities. Potential tax benefits may arise for the seller including small business tax concessions. There may be more flexibility to structure the transaction to optimise the after-tax outcome for the seller. Remember that the purchaser of shares inherits all the “skeletons in the cupboard” of the entity acquired and warranties in the agreement may be of little future value if the seller has dissipated the funds received.
Unrecorded liabilities: including tax liabilities or warranties the purchaser may not know of. It is important to ensure tax, legal and accounting due diligence is undertaken in an effort to identify these liabilities.
Stamp duty: may make it more attractive to acquire the shares than the assets. Each state in Australia has different stamp duties, so a Buyer must make themselves aware of State Stamp duties
Warranties: the purchaser will need to ensure they obtain relevant warranties from the purchaser to ensure they are not left with unresolved liabilities such as unpaid fringe benefit tax or payroll tax.
Property leases: review property leases in the entity name including “make good provisions”.
Regardless of whether the transaction is structured as an asset purchase or a share purchase it is essential to ensure that both a seller and a purchaser have undertaken sufficient due diligence to ensure there are no unpleasant surprises following the sale/purchase. Furthermore, the purchaser’s preferred vehicle for carrying on the future business will require specific tax and related asset protection/succession advice.