The most common transactions effected between sellers and purchasers of businesses are either through the sale and purchase of assets or shares. Are you aware of the different implications for sellers and purchasers in relation to each type of transaction?
Usually the structure of a transaction will be driven by tax considerations in favour of the seller. There is no one size fits all solution for sellers. Relevant considerations may include accessibility to small business capital gains tax concessions, the ownership structure of the business, whether seller seeks capital gains tax rollover relief and so forth.
It is common for sellers to prefer to sell through a share sale. However this is not usually preferred by the purchasers due to the risk of inherited liabilities, particularly in relation to companies with a lengthy trading history. By purchasing the shares, the purchaser will acquire all of the liabilities of the company. This risk can be somewhat mitigated by undertaking a rigorous due diligence review, indemnities and warranties in the share and purchase agreement and continuing insurance cover. However, these measures will not fully remove all risks. But it is not all bad news for the purchaser.
Advantages of purchasing shares instead of assets include:
- less stamp duty liability
- client, supplier and employment contracts remain with the company except those containing change in control provisions – this means there is less effort and risk associated with ensuring clients, suppliers and employees remain with the company, and
- all assets and intellectual property owned by the company will remain with the company – again there is less effort and risk associated with ensuring the company will continue to own the assets and intellectual property.
On the other hand, in an asset sale and purchase, the main advantage to the purchaser is it will not acquire any liabilities associated with the business prior to the date of sale as they will remain with the company that owned the business. However the disadvantages in acquiring assets include:
- greater stamp duty liability
- greater effort and risk in transferring client, supplier and employment contracts to the purchasing entity, and
- greater effort and risk in ensuring assets and intellectual property transfer to the purchasing entity.
Although there are advantages and disadvantages for purchasers and sellers associated with each type of transaction, there are ways to mitigate risks that are associated with them.
Practical tips from Aspect Legal:
- If you are a seller, make sure you know what the optimum position is for you from a tax perspective before you sell your business so you can structure the sale appropriately in a way which is most attractive for purchasers, and
- If you are a purchaser, mitigate your risks appropriately by undertaking due diligence that is relevant to the type of transaction proposed by the seller.
Contact us on [email protected] if you are considering a sale or purchase, and you woud like a confidential obligation-free discussion.
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