Legal issues when buying or selling a business

Introduction

Our lawyers have recently worked on several business sales, both asset and share sales. These sales spanned various industries including hospitality, 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 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 the due diligence process.

An asset sale involves the sale of business assets owned by a company. Common sale assets include plant and equipment, goodwill, stock, real-estate, 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 retaining its assets and liabilities. It is the ownership of the company that changes hands not the business assets.

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 purchaser 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.

Key considerations

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 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.
  • 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.
  • 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.
  • What assets are to be included and excluded in the sale. These items should be clearly listed in the sale agreement.
  • 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.
  • 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.
  • Whether the purchase price will be adjusted at settlement due to carry over entitlements for transferring employees (e.g. annual leave, long service leave, personal carer’s leave).
  • The treatment of debtors (i.e. customers who owe the business money). In many instances, book debts are excluded from the business sale.
  • The stock stake process and the timing for this. This issue is often overlooked, creating confusion immediately prior to completion.
  • Tax implications, including duty and GST.
  • The warranties required from the seller (warranties could cover issues such as the conduct of the business pre completion, the ownership, 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 (including the seller indemnifying the buyer for any tax liability).
  • Conditions precedent required for the particular transaction e.g. transfer of senior employees, execution of lease documents, buyer finance approval, assignment/novation of contracts and regulatory approval. These will be different for each transaction.
  • Whether the assets of the seller, or the shares in the seller company, are encumbered (including the operation of the Personal Property Securities Act 2009). 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.

How we can help

To the extent that you are considering a business sale or purchase, Stork Davies’ lawyers 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.

The content of this publication is for guidance purposes only. This content does not constitute legal advice and should not be relied upon as such.  Legal advice about your specific circumstances should always be obtained before taking any action.