Selling your business? What are you really selling?


Selling your business? What are you really selling?

We sometimes use the terms “business” and “company” interchangeably without realising that they are not synonymous. When we refer to the sale of a company, we generally mean the process under which a seller sells their shares in a company. Under a share sale, the company itself is unchanged – meaning the assets and the liabilities of the company are transferred to the buyer. A business sale, on the other hand, generally refers to selling the assets of a company, also known as an asset sale. To avoid confusion, we will only use the term “asset sale” in this article.

An asset sale, as the name suggests, involves the sale of the company’s assets. The buyer gains ownership of those assets but the seller retains ownership of the company and, generally speaking, the liabilities of the company don’t transfer.

Neither sale structure is risk-free so it is important to understand the distinction between selling assets and selling shares and what consequences follow. The decision as to which structure of sale best suits a seller will depend on some key considerations.

Tax considerations may suggest a preference for proceeding one way or the other. The tax consequences are complex and depend, amongst other things, on who owns the shares in the selling entity and whether the share owner is a trust. It will be critical for any seller to obtain appropriate tax advice on the different tax consequences of each approach.

Contracts

In an asset sale, for the buyer to receive the benefit of key commercial contracts, the seller will need to assign all existing contracts to the buyer. Often, a counterparty’s consent to assignment will be required. This could present problems as the counterparty (whether a customer or a supplier) may seek to renegotiate the contractual terms. The assignment process can become time consuming where there are many contracts involved, all with different assignment provisions, and this may impact on the ultimate price that the buyer is willing to pay for the assets.

Only the “benefit” of a contract is able to be assigned by the seller, unless the relevant counterparty cooperates and signs a novation agreement. As a seller, if you are party to any long-term, more onerous contracts, you may wish to novate those as part of the sale, as only in that way will you be fully “off the hook” under those contracts.

Conversely, in a sale of shares, contracts to which a company is a party do not have to be assigned to the buyer. Though the buyer takes control of the company in a share sale, the contracting party, the company itself, does not change.

This does not necessarily mean that it will be a smoother or safer process if the seller chooses to sell shares rather than assets. Share sellers should always be alert to any “change of control” provisions in the contract which may be triggered by the sale. Such a provision may require the seller to obtain the consent of the other party to the contract prior to completion of the share sale.

Employees

When selling assets, the employees of the company do not automatically become employees of the buyer. The buyer can essentially cherry pick which of the seller’s employees it would like to employ. Employment will continue only if the buyer makes a new offer of employment and the employee accepts.

If employees are re-employed by the buyer, the buyer may receive an allowance (that is, a reduction on the purchase price) on completion to reflect that it will assume responsibility for paying the employee’s accrued long service and annual leave entitlements. Personal leave is usually not included. The treatment of employees will have important consequences for the seller in an asset sale context, too – where employees are terminated without (generally) an offer from the buyer on “no less favourable” terms, the seller must pay out the employee’s redundancy entitlement. That may happen, for example, if the buyer doesn’t agree to offer employment to all the seller’s employees, or, for those who are offered employment, doesn’t recognise their prior service with the seller.

This is a very different position to a share sale, where existing employee arrangements are typically not affected, as the employer entity does not change. However, the buyer may still negotiate some adjustment in the purchase price to cover the buyer effectively assuming liability for leave entitlements.

Warranties

A warranty is a representation about what is being sold, for example, that a seller has good title, is not in breach of any contract and that there is no litigation pertaining to the company the shares of which are being sold.

Sellers can usually expect to give fewer warranties in an asset sale, compared to a share sale. This, of course, will vary depending on the particular company and the risks involved in the sale but generally speaking, this is the case for the following reasons.

Asset buyers are liable only in relation to liabilities they have assumed and assuming a liability requires three parties to agree – buyer, seller and also the continuing party to the relevant contract, so often, many fewer liabilities pass to a buyer on an asset sale.

On the other hand, whilst a seller may need to give less warranties in an asset sale, it will probably be left with more liabilities than in the case of a share sale where, at least in theory, all of the liabilities of the company pass with the company to the buyer.

Comparatively, all past, present and future liabilities of a company pass to the buyer on a sale of shares. These might include harder to identify liabilities (potentially, yet to emerge) such as a tax return being challenged by the ATO, an environmental contamination liability for premises owned or occupied years ago or a claim from employees for being underpaid some time back. The possibility of finding skeletons in the company’s closet or having to assume liabilities after completion, of any magnitude, means that a share purchase is considered more risky than an asset purchase. For this reason, sellers are typically expected to give broader warranties for the buyer’s protection.

Stamp duty

In Victoria, a buyer will generally not have to pay stamp duty in a sale of assets except to the extent that land or motor vehicles are being transferred. The laws of other states should be considered where assets are located elsewhere.

Generally, share sales do not attract stamp duty. However, duty will be charged in a sale of shares in Victoria where:

  • the company whose shares are being sold is “land rich”, meaning it owns land in Victoria with a threshold value of $1m or more and its land holdings in all places comprise at least 60% of the unencumbered value of all its property; and
  • the transfer of shares represents the acquisition of a significant interest in the company (being 50% or more in the case of a private company and 90% or more for a listed company).

Stamp duty on such a share transfer will be assessed based on the value of the transaction, ranging from 1.4% up to 5.5% where the value exceeds $960,000.

GST

A sale of shares is GST-free. For an asset sale, if a the seller provides to the buyer all assets necessary for the continued operation of the enterprise, this will be classified as the supply of a going concern and be GST-free. Otherwise, if a seller doesn’t provide to the buyer all assets necessary for its continued operation, GST will be payable.

Conclusion

It is important to understand the fundamental differences between an asset sale and a share sale, as each represents a different risk proposition for a buyer. That being the case, the impact on a seller will differ as between the two alternatives. The differences may emerge in the price received, risk retained or the mechanics for transferring certain assets. Tax is also likely to be a key consideration.

If you would like advice on selling your business, please contact our Corporate & Commercial Team at Hunt & Hunt.


with Michelle Nguyen
Graduate at Law

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