What is the best way to buy or sell a business?
Corporate Law - 25 May 2021
When buying or selling a business, the most pressing question often asked of advisers is the best way to conduct the sale. The two primary methods of selling a business involve a sale of the business assets (think everything from stock, buildings, or intellectual property) or alternatively, the transfer of the company’s shares to the purchaser.
While both achieve the same outcome – a transfer of the business – there are several legal, accounting and tax factors to consider.
What is a business sale?
A company conducting a business is comprised of assets such as:
- Intellectual property and goodwill (e.g., trademarks, software, customer lists);
- Plant and equipment (e.g., computers, machinery, trucks);
- Stock; and
- Land (e.g., a lease or land).
A business sale involves selling the assets of the business, rather than the company which owns the assets (which would be a share sale). The contract between the parties requires the seller to transfer legal title to the assets to the buyer. The buyer will also take over the lease, become the new employer of the business’ employees and step into the shoes of the business under any contracts the business has with third parties (e.g., utilities and supply contracts).
A business sale is often the preferred structure for buyers as only the business assets are being acquired. Any liability sitting in the company (e.g., loans, potential litigation) do not ordinarily transfer to the buyer. That means the buyer can take the business ‘clean’ and start fresh.
That said, if the business has important licences to operate (particularly government licences), a business sale can sometimes complicate the transaction as the existing licence will need to be transferred to the buyer (often necessitating the consent of a regulator) or an entirely new licence granted.
Also from a tax perspective, business sales in Queensland attract transfer duty (i.e., stamp duty) and potentially GST (if the sale is not a going concern) which can increase the transaction costs for the buyer. The seller may also incur CGT on the sale of certain capital assets (e.g., formal IP, buildings, trucks etc) but the small business CGT concessions may be available to certain entities. There is also a Queensland transfer duty exemption available for small business owners upon the sale of assets to complete a restructure from a sole trader, partnership, or discretionary trust to a company.
What is a share sale?
Unlike a business sale, a share sale does not change the legal owner of the business which remains the company. However, the buyer acquires the shares in the company allowing it to control the business and ultimately pay dividends.
A key benefit for share sale transactions in Queensland is the lack of transfer duty and settlement is rather straightforward as the business continues as usual without having to open new bank accounts or enter into new contracts with third parties and employees (unless there are ‘change of control’ provisions). Further, the sellers may be entitled to a CGT discount on their shares, so a buyer may be able to negotiate a more favourable purchase price for the shares. CGT rollover relief may also be available for certain transactions (generally restructures).
However, because a share sale is simply changing control of the company, any liability and debt in the entity will remain and become the buyer’s problem. For that reason, buyers will often require an opportunity to conduct detailed due diligence investigations and may potentially price this risk into any purchase offer and seek comprehensive warranties from the sellers.
What is best for me?
The best structure for you depends on:
- Whether you are buying or selling the business;
- The nature of the business and the industry generally (including licences required to operate).
- Whether it is practically more efficient to just transfer ownership of the company rather than all the individual assets, contracts, and employees of the business.
- Where the business is located and any transfer duty considerations.
- The history of the business and any legacy liability issues (including unknown tax liabilities!); and
- The tax considerations of both the buyer and seller (e.g., whether it is more advantageous for the company in a business sale to receive the income or a shareholder in a share sale to be subject to CGT).
If you are thinking about buying or selling a business, we recommend you engage early with your legal, accounting and tax advisors to obtain tailored advice on the best exit or acquisition strategy for your circumstances. Please do not hesitate to contact us for an initial discussion to see how we can help structure your goals.
Co-written by Troy Maloney.
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.