Whether you are looking to acquire an established operation or transition out of a business you have built, understanding the legal structure of the transaction is essential. The way a business changes hands affects everything from tax obligations to ongoing liabilities, so getting it right from the start protects what matters most to you.

At Bateman Battersby Lawyers, helping people start, buy and sell businesses is one of the main things we do. If you are starting a business from scratch, we can help you with matters such as the legal structure of your business, partnership or shareholders agreements, your commercial or retail lease, and drafting your terms of business.

If you are acquiring or selling a business, we can also help.

There are three main ways that a business transitions to new ownership, and we are often asked what the difference between each transaction structure is. Here is an explanation for you.

Business Sale Agreement

This is a contract where the buyer purchases the actual business operation, including everything it needs to keep running in the same way it ran before. The contract usually includes the purchase of key business assets including goodwill, the business trading name (registered business name), customer or client lists, stock, plant and equipment, and intellectual property. It often involves the transfer or assignment of important arrangements such as a commercial or retail lease for the premises from which the business is run, transfer of supplier or customer contracts, and sometimes transfer of employees.

In the case of a business sale agreement, the seller is usually the entity that operates the business. That can be an individual, a number of individuals, or most commonly, a company. In this scenario, the shares in the company are not sold; rather, the assets of the company (being the business and all of the associated assets listed above) are sold.

Usually, if a business is sold in this manner and includes all the things necessary to keep running the business, it constitutes thesupply of a going concern, meaning there is no GST payable in addition to the purchase price.

Asset Sale Agreement

An asset sale agreement is much more narrow than a business sale agreement. It is a contract where the buyer purchases only specific assets listed in the contract.

For example, the owner of an existing equipment hire business might be looking to expand. The buyer might already have its own premises and trading name, so rather than buying a competitor’s entire business, it only purchases the plant and equipment to add to its existing fleet. In this case, the buyer essentially cherry picks the assets it wants and does not acquire everything required to run the business. There is no transfer of shares in the company or units in the unit trust.

It may be harder to treat an asset sale agreement as a going concern for GST purposes, so buyers need to factor this into their plans and seek accounting advice before entering a transaction of this type.

Sale of Shares in a Company (or Units in a Unit Trust)

A company or trust is an entity unto itself, capable of owning assets, buying and selling property, running a business, and entering into contracts. A share or unit sale agreement is a contract where the buyer purchases the shares in the company or unit trust that owns and operates the business. The business does not “move” to a new owner; rather, the buyer takes control of the same company or trust that has always run it.

The upside of this structure is that usually the parties do not need to worry about matters such as transferring customer contracts, transferring employees and dealing with employee entitlements, or transferring or establishing new supplier agreements.

The potential downside for the buyer is that acquiring shares in a company means you also acquire the company’s history. For example, if the company is carrying tax debt or other liabilities, or may be the subject of some kind of claim or litigation in the future, this is a risk that the buyer essentially assumes.

In almost all cases, if a person or entity buys shares in a company or unit trust, they will also need to become or nominate a director of the company or the corporate trustee of the unit trust.

Financial and accounting advice and due diligence is critical in any business acquisition but is particularly important if you are contemplating buying shares or units in an existing entity. You need a thorough understanding of the entity’s asset and liability position, including any taxation history, to ensure you are not inadvertently taking responsibility for liabilities you never intended to.

Considerations for Sellers

The above is fairly buyer centric. We also act for sellers in relation to all of the above types of transaction.

From the seller’s perspective, the main focus should be accurately defining what is being sold. Key considerations include:

• If the sale is subject to the transfer or assignment of an existing lease, or the granting of a new lease of an existing commercial or retail premises of which you are the tenant, the landlord’s consent will be required.
• If there are assets in the business being sold to the buyer that are subject to some sort of security interest (including a registration on the Personal Property Securities Register), steps will need to be taken to discharge the security interest, usually by paying out any outstanding debt.
• You will need to compile plant and equipment lists, stock lists, and details about any transferring employees, including accrued employment entitlements.

Get Experienced Legal Guidance

As you can see, there is quite a bit involved to effect a transaction like this properly and comprehensively. With more than 40 years of experience helping Penrith businesses navigate these matters, we can guide you through the process with clear, practical advice.

Give us a call today if you would like to discuss buying, selling, or starting a business.