Often the concept of buying or selling a private company is confused with buying or selling a business. However, there are fundamental differences between the two. The sale of a company occurs when all of the shares in that company are acquired (Share Sale), while the sale of a business occurs when the assets of that business are acquired (Business Sale). In this article, we look at how the two processes differ, along with the risks involved with each.
What is a Share Sale?
The law recognises a company as a separate legal entity, which is independent from its shareholders. A Share Sale transaction involves taking over the company in its entirety, including all associated risks, liabilities, obligations and claims in connection with that company.
A Share Sale transaction usually involves an exhaustive due diligence process and completion of the Share Sale is typically conditional upon satisfactory due diligence. Accordingly, sellers are typically required to provide extensive warranties and indemnities with respect to the Share Sale.
Usually, a Share Sale transaction is documented in a share sale agreement and requires transfer of shares from the seller to the buyer. An experienced commercial and business lawyer can assist with drafting the share sale agreement, along with any other documents associated with such a transaction. In most cases, shareholders and directors of the company change over to the buyer and its related entities. As such, the seller and the buyer have an obligation to notify the regulatory body, Australian Securities and Investments Commission (ASIC) as to the changes to the company's ownership structure as well as general compliance with the Corporations Act 2001 (Cth) at all times.
Key factors to consider in a Share Sale transaction
When buying shares in a company, the buyer should be aware of the risks associated with acquiring the company as a whole. These risks are generally greater than the risks associated with buying a business, as owning the company means also owning the liabilities of that company.
Therefore, it is usual practice for the buyer to carry out extensive due diligence, including requiring disclosure of all past activities of the company, its shareholders and directors, and also requiring that the seller to provide warranties and indemnifies that are more robust than those required in a Business Sale transaction. This is so that the buyer is protected from being exposed to unwanted and unknown liabilities and risks of the company following the buyer acquiring the shares in the company.
There are also tax considerations that might be beneficial to the seller and should be considered in anticipation of such a transaction. It is important to engage an experienced commercial and business lawyer to assist with this process, in order to protect you from any risks or liabilities associated with the transfer of the company, and advise you on the tax implications involved.
What is a Business Sale?
A Business Sale transaction usually involves buying the assets of the business, including stock, equipment and goodwill. Most commonly, the assets that are transferred to the buyer as part of the Business Sale transaction include the business name, intellectual property and client lists.
Generally, in a Business Sale transaction, the buyer does not take on the liabilities of the business or those liabilities of the seller associated with the business. Normally such a transaction is documented in a sale of business agreement.
Key factors to consider in a Business Sale transaction
Intellectual Property such as trademarks is a valuable asset for most businesses. Therefore, it is not uncommon for the buyer to insist on acquiring all of the assets of the business, particularly the business' intellectual property, business name and client books and lists, following completion of the Business Sale.
Sometimes, a Business Sale transaction involves the consent and assignment of third-party contractors before the business can be sold. This could include sub-contracting agreements and exclusive distributor agreements. Innately, the nature of the business determines the type of third-party contracts that may be required to be assigned.
In a Business Sale transaction, the seller may need to terminate the employment of those existing employees of the business, whom the buyer wishes to retain following completion, so that the buyer may re-employ those employees on terms that are usually similar to the terms of their existing employment agreements.
Similarly, if the business is operating from a premises, which is subject to a lease, the business sale agreement is often subject to either the landlord agreeing to transfer the lease to the buyer or negotiating a new lease with the buyer.
When buying a business, the buyer is inherently exposed to less risks following completion of a Business Sale transaction, which is contrary to a Share Sale transaction. This is because the liability of the business mostly remains with the seller even after completion of the Business Sale transaction has taken effect.
Ready to get help with your Business Sale or Share Sale?
Whether you are looking to purchase or sell a business or shares in a company (either all or some of the shares), it is important to obtain legal advice at the very outset to ensure that the process runs smoothly and without adverse risks.
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.