Because of the availability of capital gains tax concessions for
sale of shares held by individuals or trusts in a company, most
sellers of businesses in Australia prefer to structure a sale of
their business as a share sale transaction.
For a purchaser this means that you are likely to be offered
shares in a company. As a result, in addition to the assets of the
business (being what you want) you will also be buying all the
liabilities of the company. To understand these liabilities as well
as check on what is being represented to the buyer it is essential
that the buyer:
Conducts a due diligence process in order to identify the
potential liabilities; and
Negotiates a share purchase agreement that protects the
The due diligence process should:
Involve commercial, accounting, tax and legal due diligence. Be
careful to ensure that tax due diligence does not slip between the
cracks of your advisors scopes. It is in our experience a key risk
as very often companies have not paid the correct tax or withheld
the correct PAYG amounts (short for "pay as you go"
deductions employers are required to withhold from employees pay
and pay to the tax office) or paid the required 9% superannuation
contributions for employees.
Be commensurate with the degree of risk as well as likelihood
of the risk occurring. This simply means that the process needs to
fit the amount of money at stake.
Be carefully controlled and co-ordinated. This includes
co-ordination between the advisors as well as co-ordination of the
The share purchase agreement should:
Include extensive warranties including a warranty that the
accounts are correct and that there have been no material changes
since the date of the accounts and a warranty that all material
information has been disclosed.
Include a carefully drafted tax indemnity to indemnify the
company and buyer against tax liabilities of the company.
Include appropriate guarantees.
Of course these suggestions are simply brief high level thoughts
regarding some of the traps to watch out for. In every transaction
it will be essential to consider the particular circumstances and
to obtain appropriate professional advice.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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