You might think there’s really only one way to sell a business – the buyer makes an offer, the seller accepts the offer, and the deal is done. Easy, but incorrect.
There’s a little bit more to it unfortunately, and the main question that interests the lawyers is whether the parties are trying to negotiate an Asset Sale or a Share Sale.
So what’s the difference ?
An asset sale involves the sale or purchase of part of the business, while a share sale involves the sale of 100% of the company’s shares. Tax is a key ingredient in determining which way the parties transact.
Generally speaking buyers will prefer an asset sale because they only want to buy the parts of the business they like. This makes sense. As a buyer you want the opportunity to pick and choose ahead of buying 100% of the entire business where you might inherit some bad with the good.
On the other hand, sellers will often prefer a share sale as it gives them a clean break from the business. Sellers have an all or nothing approach rather than winding the business down or just selling the key assets.
While the choice may sound relatively simple choosing the wrong structure can dramatically effect the after-tax position for both parties. Regardless of which structure is preferred it is essential to ensure that both parties and their advisors have undertaken sufficient due diligence to ensure there are no nasty surprises after the deal has been done.
Five (5) points to consider with an Asset Sale
1. Employees
When buying an asset the employment relationships are not transferred to the buyer. It will be mean the seller has to terminate the employment contracts and the buyer enters into new employment contracts with each employee. A key consideration for the seller is the treatment of accrued entitlements which vary depending on the terms and conditions for each employee.
2. Assignment
A “biggie” for real estate rent rolls where key contracts or the consent of landlords to be assigned may be required – or they may not be assignable at all.
3. Cherry picking the asset
Buyers have the opportunity to choose which assets they want, and to leave unwanted assets with the seller.
4. Apportionment of purchase price
The purchase price may be apportioned between the plant and equipment, stock, and goodwill within relevant parameters that may result in some tax savings for the seller.
5. Goods and Services Tax (GST)
Where all the assets of the business are transferred across to the buyer the sale may be classified as a ‘going concern’. Alternatively GST may apply if the sale cannot be categorised as a going concern.
Five (5) points to consider with a Share Sale
1. Business Continuity
The buyer steps into the seller’s shoes and the business carries on. In many cases, customers may not even be aware of the change of ownership.
2. Employees
Unlike the asset sale, the employees will usually remain with the business and the buyer as the legal entity of the employer remains unchanged.
3. Assignment
Many real estate business sellers prefer a share sale as it doesn’t require the assignment or issuing new management agreements prior to the sale. This issue may vary from state to state but generally its a lot easier to sell the shares than re-assign management agreements, particularly with larger portfolios.
4. Business Liabilities
Due diligence is the key here for the buyer particularly regarding unrecorded liabilities including tax and warranties they may not be aware of.
5. Seller Warranties
The buyer must obtain warranties from the seller to ensure they are not left with any nasty surprises post sale including unpaid fringe benefit tax or payroll tax.
Having negotiated a number of both asset and share sales transactions I believe the key tip for both parties is to take sound legal and accounting advice, and do it early.
