Many businesses will change ownership within their lives. There are two common ways that you can do this, either through a business sale or a share sale. If you are looking to sell your business, it is essential to understand the difference. When selling, you can either undergo a:
- business sale – which involves a transfer of all the business assets from one owner to another; or
- share sale – where the shares of the company that own the business are transferred from one owner to another.
In a business sale, you sell all of business' assets and equipment to a buyer. It is important to understand that this involves a transfer from one legal entity to another. This can be company to company, trust to company, sole trader to trust etc. Another name for this type of sale is an asset sale. When it is described as an asset sale, you should confirm whether all of the assets are being sold or only a portion of them – as it can be either.
The other way you can sell a business is by selling the shares in the company that owns the business.
For example, Cafe Pty Ltd (a company) owns Quick & Easy Cafe (a business). If you, as a buyer, decide to acquire the business via a share sale, you would purchase the shares from the existing shareholder of Cafe Pty Ltd. In this type of sale, Cafe Pty Ltd will continue to own the cafe business. However, you become the new owner and controller (i.e shareholders and directors) of the company.
In this scenario, none of the equipment, assets, or contracts are being transferred, making for a smoother transition. However, it is riskier as a buyer as you are taking over the company and any past risk associated with its business and other obligations – including tax paid to the IRD.
When determining what type of sale is best for a specific situation, you should consider the effort required to transfer the equipment and contracts versus the potential risk of taking over ownership of the company.
What Is the Business Sale Process?
Your business may be quite complex and hold many contracts with different parties, including suppliers, clients, employees and contractors. Therefore, a lot of effort is required to transfer these arrangements.
In many instances, the buyer will need to enter into new contracts or at least you will need to obtain the consent of the other party to transfer the contracts. Also, if the business is location-based, the buyer must enter into a new lease or transfer the existing lease to the new buyer. This can be a lengthy process as the landlord needs to approve the new tenant. Likewise, the landlord, seller and buyer will need to negotiate and sign a document to transfer the lease.
Further, the following are common steps in the business sale process:
- buyer conducts due diligence on the business and its financial records (this can also occur after the sale agreement is signed);
- the seller's lawyer prepares the initial draft sale of business agreement;
- the buyer's solicitor will then review this draft and suggest changes;
- a period of negotiation will then occur until the agreement is in an agreed form;
- the sale agreement is signed, and the buyer pays a deposit;
- if there are any conditions precedent, then the parties will satisfy these elements (i.e. transferring the lease); and
- the parties complete the sale on the date set in the sale agreement, and the buyer pays the balance of the purchase price.
In many business sales, certain events need to occur before completion can occur. A common example is that the landlord must first consent to transfer the lease, and parties sign the transfer document. However, the conditions precedent can relate to anything that is of key importance to the buyer or seller. This changes depending on the business but could also include critical employees signing employment agreements with the buyer. The sale agreement is structured so that completion cannot occur until all of the conditions precedent have been satisfied.
If a condition precedent cannot be satisfied (usually within a set period), the sale agreement will usually let either party terminate the agreement. An example is if the landlord rejects the buyer as a tenant of the premises. In this instance, the sale is frustrated and should allow the buyer to terminate.
What Is the Share Sale Process?
The agreement drafting and negotiation process are very similar to the business sale process. However, you will not need to transfer most contracts or obtain consent as the company will still be a party to the relevant contracts. However, some contracts have 'change of control' clauses that require consent where the company's controller is changing (i.e. shares in the company are being sold). This is typical in leases, franchise agreements and other onerous agreements.
There can still be conditions precedent and can relate to these change of control clauses or other important events. However, the share sale agreement is usually longer and more complicated than a sale of business agreement. This complexity often relates to the warranties that the seller is providing about the company and the business. Warranties are promises that the seller makes about the company or business. As the buyer is taking over the company's risk and business, the warranties are its protection. Where a warranty is untrue, and the buyer suffers a loss, they can claim against the seller.
Some examples of commonly seen warranties are that the seller must:
- pay all tax to the IRD;
- not be involved in a dispute with any employee;
- not breach of any material contract; or
- have all licences and approvals to operate the business.
Once the share sale is complete, you must update the Companies Office within 10 working days for the new shareholder(s) and within 20 working days for the removal and appointment of new director(s). You must also update the company's share register to reflect these changes.
When determining what type of sale may be the most appropriate, you will need to examine the business in question. Whether a share sale or business sale is most appropriate will depend on the complexity of the business and the level of risk that the buyer is willing to accept. As a buyer, you must conduct due diligence on the business you are looking to purchase. During your discussions, be clear about what type of sale you are referring to, as these terms are sometimes used interchangeably.