When acquiring or selling a business, choosing between a share sale and an asset sale is pivotal, as each approach carries distinct legal, financial, operational, and tax implications.
This article, written by Argon Law Special Counsel Rachel Martin, explores the key differences and considerations that both buyers and sellers should evaluate early in the transaction process to align with their financial strategies and priorities. This decision should be made in consultation with a trusted commercial lawyer and accountant/tax advisor.
Getting the structure right at the outset will also help keep your costs down and allow you to focus your resources on your business.
What is the Difference between a Business Asset Sale vs a Business Sale?
In a business asset sale, specific assets and liabilities are transferred to the buyer. This transaction may include tangible assets like plant and equipment, properties, and stock, as well as intangible assets such as customer contracts, goodwill, and intellectual property.
Conversely, a business share sale involves the sale of the company’s shares, transferring control of the company—including all assets and liabilities—to the buyer.
Business Asset Sales
Advantages of a Business Asset Sale for Buyers
Selective Acquisition: The buyer predetermines the list of assets and does not inherit liabilities associated with the company or seller prior to settlement, effectively ‘cherry picking’ the most desirable assets. This gives the buyer greater transparency and certainty over assets and liabilities acquired and avoids the risk associated with the unknown history of the seller.
Employee Selection: In respect of the employees, the buyer can select which ones it wants and avoid unfair dismissal claims. There is also an opportunity to negotiate with the seller for a price adjustment on account of the employee entitlement liabilities accrued prior to settlement.
Disadvantages of a Business Asset Sale for Buyers
Contractual Negotiations: The buyer will need to negotiate with third parties for consent to transfer contracts, which could include customer contracts, commercial leases and licenses. Sometimes a third party will not agree or will try to impose conditions. The process can be costly and time consuming and it may also disrupt business continuity.
Licensing Issues: Some assets such as government licenses and permits may not be transferred, and the buyer may need to apply for new ones.
Transfer Duty: The buyer must pay transfer duty calculated with reference to higher of the value of the assets sold and their market value.
Advantages of a Business Asset Sale for Sellers
Limited Warranties: As the buyer is not acquiring the entire company, ordinarily the seller will provide fewer warranties and indemnities.
Retention of Assets: The seller can negotiate to keep certain assets.
Disadvantages of a Business Asset Sale for Sellers
Remaining Liabilities: Any liability of the company in respect of business assets sold will remain the seller’s responsibility. Of course, the seller can attempt to protect itself within the sale agreement, e.g. an indemnity from the buyer.
Security Interests: The seller will need to release all security interests on assets to be transferred, this may include paying funds owed.
GST Implications: GST may be payable on the sale of the assets. The ATO allows certain exemptions such as where the business is sold as a GST-free going concern.
Business Share Sales
Advantages of a Business Share Sale for Buyers
Seamless Transition: Buying the business via a share sale leads to minimal potential disruptions to relationships with customers, employees and business operations.
Continuity of Contracts: In most cases current contracts, such as leases and licenses, remain on foot (subject to the seller needing to address any change of control provisions). Continuity of contracts is particularly helpful if there are numerous contracts in place, or the company holds a lot of intellectual property such as business names.
Goodwill Preservation: If the company has significant goodwill and positive brand recognition, a business share sale will help maintain consumer recognition of the underlying entity.
Financial Benefits: Sometimes a share sale can help the buyer avoid or reduce stamp duty costs in relation to particular assets.
Disadvantages of a Business Share Sale for Buyers
Inheritance of Liabilities: As stated earlier, the buyer will inherit all the liabilities of the company, including undisclosed and contingent liabilities. This may include tax or litigation liabilities. The buyer can mitigate this by conducting proper due diligence. This can be expensive and time consuming.
Warranty & Indemnity Concerns: The buyer can also negotiate warranties and indemnities addressing any issues that come to light during the due diligence. Whether or not these are effective depends on the seller’s financial position post-sale or the availability and cost of warranty insurance.
Change of Control: In a business share sale, some existing agreements may include a ‘change of control’ clause requiring a third party’s consent to selling the shares to a new entity (i.e. the buyer).
Advantages of a Business Share Sale for Sellers
Business Continuity: As all clients, suppliers and employees remain with the company, there is less administration and risk to the seller all while ensuring continued trade for the buyer.
Security Interests: Typically, security interests will remain with the company, in which case there will be no requirement to release security interests, speed-tracking the process of sale.
Financial benefits: The seller may qualify for a capital gains tax discount on the sale of shares.
Disadvantages of a Business Share Sale for Sellers
Extensive Indemnities: As the buyer inherits liabilities attached to the company, the seller is expected to provide more comprehensive indemnities and warranties. These may remain for a substantial period post-settlement and may include personal guarantees from the directors.
Warranties and Indemnities: The buyer may request delayed payment of a percentage of the purchase price to protect it from any breach of warranties or indemnities post-settlement.
Shareholder Agreements: The seller will need to navigate its internal share sale mechanisms such as addressing pre-emptive rights to existing shareholders. This may be straightforward or complicated depending on the share structure and appetite for sale.
How can Argon Law Assist in your Business Sale?
Choosing the right structure for your business sale is crucial for maximising benefits and minimising risks.
At Argon Law, we are committed to guiding you through this intricate decision-making process, whether you are a buyer or a seller, ensuring a transaction that aligns with your strategic goals and legal requirements.
We invite you to leverage our expertise in commercial law to make informed, efficient decisions tailored to your unique situation, so get in touch with our team today.
If you’re looking to sell your business, ensure that you have the right Business Sale Contracts ready or, if you’re thinking of transferring ownership to a successor, learn about How to Plan for a Business Succession.
