Our lawyers have recently worked on various business sales, involving both assets and shares. These sales spanned various industries including hospitality, construction, childcare, real-estate, and agriculture. On the back of that work, we thought it worthwhile to note some of the key factors to consider in a business sale transaction.
Share or asset sale?
When parties discuss the sale of a business (where that business has a company structure), they must consider whether the business will be sold by selling the shares of the company or the assets of the company. That initial decision, which should be made with the benefit of prior legal advice and tax / accounting advice, will impact the matters to be addressed by each party and the type of sale contract to be used. It will also have a significant bearing on any due diligence process.
An asset sale involves the sale of business assets owned by a company (or other entity). Common sale assets include plant and equipment, goodwill, stock, real estate (including fee simple and leasehold), contracts (including service and supply), licences, permits, business/trading names, records and intellectual property (e.g. domain names, patents and trademarks). The contract is between the company / seller and the buyer of the assets. The seller retains ownership of the company structure and the assets of the company not included in the business sale.
In a share sale, the buyer purchases the shares in the company as opposed to its business assets. The transaction is between the company’s shareholders and the buyer of the shares with the company generally retaining its assets and liabilities. It is the ownership of the company that changes hands not the business assets. The existing directors of the company would typically resign at settlement and be replaced by new directors (responsible for the management of the company) put forward by the buyer.
Although share sales are often simpler than asset sales (particularly where existing contracts, licences or permits are a key part of the sale) and the transition of the business frequently occurs with less interruption, the risk is often higher in buying shares, as the buyer will become responsible for the liabilities of the business (including tax liabilities). As a result of this, it is more common for business sales / purchases to proceed as asset sales as opposed to share sales.
Set out below are some of the key matters to think about in the sale or purchase of a business:
- Whether a due diligence process is required and, if so, the timing for that and the issues to be considered. This process may involve the buyer having access to records (including accounts) and / or key personnel of the business.
- During the sale (and due diligence) process, confidential (and potentially valuable) information will be shared between the parties. The parties should be subject to robust confidentiality obligations.
- Conditions precedent required for the particular transaction e.g. transfer of senior employees, execution of lease documents, discharge of major encumbrances, seller / buyer financier approval, assignment / novation of contracts and regulatory approval. These will be very different for each transaction.
- If it is a share sale, are there any pre-emptive rights in the shares that need to be waived by the shareholders.
- What assets are to be included and excluded in the sale. These items should be clearly listed in the sale agreement.
- Whether regulatory approvals are needed. For example, the Foreign Acquisitions and Takeovers Act 1975 (Cth) regulates foreign ownership of Australian entities/businesses. In the context of hospitality, approval by Racing, Gaming and Liquor is required for the transfer of a liquor licence.
- Whether the business will continue to operate from the same premises post completion and, if so, is there a lease that needs to be assigned or is a new lease required.
- Whether any employees are crucial to the continued operation of the business. If they are, the buyer should ensure that these employees continue, or transition with, the business. Generally, the management of employees in the event of a business sale can be complex and requires careful consideration.
- Whether there are any contracts or licences that need to be assigned or novated. This issue is particularly important where the contract or licence is crucial to the business, and it is worth noting that certain contracts and licences may not be transferable.
- Whether relevant contracts contain “change of control” provisions which, for example, could give the counterparty a right to receive notice and terminate the contract in the event of a share sale.
- How the purchase price will be paid and whether there will be any amount withheld by the buyer at completion i.e. a retention sum. In some instances, payment of a deposit (on signing of the sale agreement) may be appropriate.
- Whether the purchase price will be adjusted at settlement due to carry over entitlements for transferring employees (e.g. annual leave, long service leave and personal carer’s leave). Other adjustments to the purchase price may also be appropriate.
- The treatment of debtors (i.e. customers who owe the business money). In many asset sales, book debts are excluded from the business sale.
- Whether the seller’s directors (or related entities) gave guarantees that need to be released as part of the business sale.
- How email addresses, contact phone numbers and social media accounts will be dealt with?
- Tax implications, including duty and GST. This advice should be obtained at, or prior to, the negotiation stage.
- The warranties required from the seller in favour of the buyer (warranties could cover issues such as the conduct of the business pre completion, ownership of the business, state of repair and completeness of assets, the tax position of the business, compliance with the law, potential litigation and environmental issues).
- Indemnities required from the seller in favour of the buyer (including the seller indemnifying the buyer for any tax liability) and from the buyer in favour of the seller (including for post settlement matters).
- Whether the business assets, or the shares in the seller company, are encumbered (including the operation of the Personal Property Securities Act 2009 (Cth)). Financiers frequently take security over businesses which needs to be released prior to completion of the sale. Further, plant and equipment and stock are often the subject of retention of title arrangements.
- How post completion customer warranty claims for goods and services will be addressed.
- Whether there should be restraint of trade requirements to protect the buyer.
- The stock stake process and the timing for this. This issue is often overlooked, creating confusion immediately prior to completion.
- The rights and obligations of the parties pre-completion of the business sale. For example, the buyer would typically expect the seller to continue to operate the business in a prudent manner and to maintain the value of the business. This may include an obligation on the seller to obtain the approval of the buyer to any pre completion expenditure over a particular amount.
How we can help
To the extent that you are considering a business sale or purchase, we can advise you as to the pros and cons of an asset or share sale, negotiate with the other party on your behalf, prepare the sale contract, assist with due diligence enquiries, and help you manage the sale process. We can also refer you to a tax/accounting adviser with specialist expertise in business sales.
This post has been prepared as a general summary only. It is not, and is not intended to be, legal advice with respect to any particular matter. This post should not be relied on with respect to any particular matter without taking legal advice. Stork Davies Legal Advisors disclaims liability to any person who relies on this post without taking legal advice from the firm.