In today’s The Deal Room Podcast episode we have something a little bit different. This is our new, very first Ask Me Anything session, where our host, Joanna Oakey answers your questions, these are the questions that have been provided by you as the listeners or along the way in our day-to-day practice. So today, she’ll be running through a Q&A of sorts for this session and we will be integrating these into our podcast from time to time as well. Quick questions…While I’ve got your questions and of course, What are your thoughts on… questions too. Don’t miss out on these podcast gold nuggets. If you would like to submit a question that you’d like us to answer, then please send it to us at [email protected]. So here we go with our very first Ask Me Anything session.
- What is Ask me anything?
- The difference between share sale and business sale
- Do employee entitlements continue when pursuing a business sale?
- The concept of warranties and liabilities in a sell contract for a seller
- How long do these liabilities last for a seller?
- Transaction Liability Insurance
- Can you run due diligence after a contract has been exchanged?
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Note: This has been automatically transcribed so will be full of errors! We are not providing it to you as a word-perfect version of the podcast but just as an easy way to provide you with a different way to be able to scan for information that might be relevant to you.
Hi, it’s Joanna Oakey here. And welcome back to The Deal Room, a podcast proudly brought to you by our commercial legal practice, Aspect Legal. Now today we have a bit of a different show, we have a rapid-fire Q and A here. So these are questions that I have been provided by you as the listeners or along the way along the journey in our day-to-day practice that I want to provide answers to in a quick podcast session. So today, I’ll run through a few. And we will be integrating these into our podcast from time to time now if you have a question that you’d like me to answer, then please send it to us at [email protected] And we’ll put that link in the show notes. Now, in that email, send us anything that you want to hear us talk about in the deal room podcast or anything that you’d like me to answer in a rapid-fire session now. Here we go with today’s and this is only going to be five minutes long. So this is a very quick session for you. Well, let’s see if we get it into five minutes.
Okay, the first question came out of the discussion generally about share sales versus business sales. They’re two different things. I have a book that is just about to come out. And in that book, talk a lot about the differences in share, sell and business sale, the book is called buy grow exit, we’ll be talking a bit about it on the podcast, moving forward. But just for now, in very simple terms. When you have a share sale, you’re selling the ownership section of the business, but none of the assets under the business itself or the company move. If you’re in a business sale, ultimately, what’s happening from a legal perspective is each of the assets is transferring out from the seller to the buyer. So they’re effectively moving. So we had a few questions about this. So the first question was do employee entitlements continue? Or are these negotiated in termination of employment according to a business sale agreement. So we actually should have a whole session, I think, in a podcast on employee entitlements, and dealing with employee employment law obligations for the transmission of Business at the sale of the business, because it’s a super interesting topic, lots of twists and turns lots of things to be aware of, ultimately, if there is a transmission of business, and the buyer, so let’s say there’s a business sale environment, and the buyer ends up taking on the employees who were employed by the seller, then that is considered the transmission of business about those employees. So those employee entitlements have to be dealt with, they can either be paid out, or they can be adjusted, so paid out to the employee or adjusted to the buyer, ie the amount of those employee entitlements come off the sale price. Now, there can often be a bit of negotiation around this sometimes there is a deduction that’s made from the employee entitlements in adjustments if that is going to be adjusted in the completion payment, to take into account tax, and also to take into account contingencies. So for example, if there is going to be a payment to personal leave entitlements, there may be a reduction of that amount that will be adjusted on the basis that that is a contingent liability, ie the staff in the new entity may or may not use that accrued personal leave.
Now that is so many consideration for employee entitlements, that we will have a whole episode devoted to it in a share, sell just the one thing to bear in mind is you’re not transferring the employees, the employees stay employed by the same organization because we’re not changing anything in the business itself. It’s only the ownership layer that changes. So in those sorts of situations, we have an adjustment from the purchase price. But once again, the adjustment component can sometimes be negotiated for certain reasons. For example, perhaps about personal leave accruals All right, so that’s questions about employee entitlements as I said, we’ll do a whole new episode about it. Okay, next we look at the concept of warranties and liabilities in a sell contract for a seller. One of the questions that I’ve had over time is how long do these liabilities last for a seller? The answer is, that it depends. It depends on what’s negotiated in the sale agreement. So you could have liabilities that might last for up to seven years. And sometimes we’ll have liabilities that only last for a very short period. Now, there’s a whole heap of things that we consider in working out how we’re going to protect the seller, if we’re acting on the sell-side, about the warranties, the length of time that they exist for, and the maximum cap or the maximum liability that a seller might have under these warranties. On the flip side, when we’re acting by side, we will be thinking about what we can do to use the warranties to protect our buyers to ensure that they’re not exposed to any risks that have happened in the business or the company before their time and taking it over. So this is the thing with warranties and indemnities in a business sale agreement or on a share sale agreement. This is where we help to get a fair balance of risk about losses that might occur in a business post-completion that relate to a time before completion. So there are lots of things to think about there. One thing to bear in mind is transaction liability insurance. Once again, if this is of interest to you, we will devote a podcast or two to this because it’s such fabulous insurance for sellers out there, but potentially also for buyers to understand because they might wish to require sellers to take out insurance to provide security in the deal. It’s a bit new here in the SME space in Australia. And the reason I say that is before this newer insurance came out very recently in Australia, the policies used to be hundreds of 1000s of dollars. Generally, we are now in a regime where the policies are cheap generally, you know, they can start from around about $10,000 for a policy that can last for the whole period that the warranties last. So perhaps up to seven years for that one policy. So great insurance to potentially have. If you’re interested, you’ll find some details in the show notes about that.
Now we’re running out of time in our short, rapid-fire podcast episode today. So we have time for two more questions. And then we’ll end this episode. But if you have any more questions, make sure you send them to us at The Deal Room podcast, through podcasts at aspect legal.com.au. And we’ll make sure we answer those in future episodes. Now a question here has been Is there a possibility that you can have due diligence be run after a contract has been exchanged. So that’s after both parties have signed this concept of the timing of due diligence is a really interesting thing. And it can change from deal to deal. On smaller deals, we generally have due diligence being undertaken somewhere between the signing of the commercial terms like the parties agreeing on a price and the terms of the payment of that price. And between the contract being created or drafted. That is often because, in smaller deals, the parties are trying to save money, they want to make sure that the buyer will want to go through with the purchase of the business before they go into the contract phase in any sort of mid-sized deal, larger deals. And in fact, even in many smaller deals as well. We will however run due diligence at the same time as we negotiate the sale contract. The reason for that is that makes it much faster because due diligence can take a bit of time, sometimes contracts can take a little bit of time as well. So in that situation, we might run the two together. But in other situations, the buyer might prefer to have protection against their spending due diligence during the due diligence period. And to feel assured that the seller is not going to go and sell to another buyer after they’ve expended all of their time, money and effort in due diligence. What happens, in that case, is that buyers might require that the buyer and seller into a sale contract for the sale of the business or the shares that is conditional on them completing that due diligence and this is an interesting thing.
There’s a bit of a risk for the seller here that the buyer has the seller on the hook but then finishes their due diligence and decides not to go ahead with it with the purchase of the business. On the flip side, businesses are unlikely to enter into spending time, money and energy on due diligence if they’re not serious about going ahead with the acquisition of the business. So there is a lot to think about in terms of timing when due diligence sits within the acquisition process. There are no hard and fast rules. We have transactions all the time and have timing organized in all different ways. But the end answer is, that it’s important to understand the decisions that you’re making in allowing the timing of due diligence to happen at a particular point. There are options available for you, but you have to understand the risks that you might be taking on. On the flip side, that’s where strong helpful, experienced legal advice, of course, comes into play.
Well, that’s it for our rapid-fire session. for the Q&A today here on The Deal Room podcast. I hope you found that useful. We’ve got a few more Q&A sessions coming up please let us know if you enjoy these Q&A sessions. We’re always interested to find out what it is that you are listeners want to hear more from and if you have any questions for us to add to our rapid-fire Q&A, please send them to us at [email protected] Well, that’s it for me today. My name is Joanna Oakey, you’re listening to The Deal Room podcast, a podcast proudly brought to you by our commercial legal practice, Aspect Legal. See you next time.
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