Becoming a business owner can be a rewarding experience. Buying an established business rather than setting one up from the ground can be particularly advantageous. There are, however, two ways to go about this: a share sale or an asset sale.
What Is A Share Sale?
A share sale is where a company that has shares has made a decision to sell the entire ownership of that company to the buyer.
The buyer now becomes a shareholder in the company, and acquires all the assets—by being the owner of the company which owns all the assets.
All the business assets will remain with the company—including its liabilities, which creates some aversion to share sales.
For example, if a customer of the business was sold a defective product or given negligent advice, then they would have a claim against the company that the new buyer has just taken up.
The new buyer is now responsible for defending and paying out the claim.
In some cases, though, the seller may provide the buyer with an indemnity so that the buyer can sue the seller in the event of a historical claim being made.
In order to mitigate the risks that accompany a share purchase – more often than not – the buyer will have to engage in extensive and detailed due diligence to protect themselves.
What Is An Asset Sale?
An asset sale involves the purchase of some or all of the assets owned by a company.
The buyer will only gain control of the assets that they are purchasing.
These assets could be anything from equipment and buildings to intellectual property, domain names and goodwill. In this case, the seller will retain ownership of the actual company previously owning those assets.
In this scenario, no liabilities are generally transferred across, other than those specifically defined as a “Sale Asset” in the contract of sale.
However, from a buyer’s perspective, there may be more effort, cost and risk involved in transferring all of the contracts and client lists out of one entity and into another as part of an asset sale.
Share Sales vs Asset Sales: Which One Should I Choose?
When determining whether a share sale or an asset sale is right for you, there are several factors you should consider. We’ve outlined some of these below.
Share Sale: The liabilities of the company will generally transfer to the new buyer (it can even be a historical tax non-compliance!). To protect themselves in these situations, buyers often require sellers and their directors to indemnify the buyer against such claims and losses that may arise in the future.
Asset Sale: Unless the buyer has expressly assumed any liabilities in the contract in relation to particular assets, liabilities generally are not inherited by the buyer.
Share Sale: As the entire company is moving, it can be a lot easier to transact. You don’t have to re-sign any contracts with clients, service providers or even employees as the entity remains the same. Having said that, if there are “Change of Control” clauses in contracts entered into by the company, you may need to get consents of counterparties (e.g. a landlord of a lease) to go ahead with the sale.
Asset Sale: When you’re purchasing just the assets of a business, you will need to get your clients, suppliers and employees to sign new contracts to be bound with your new entity. In some cases, it may be that third parties need to agree to the buyer’s taking the agreement (commonly in Supply Agreements).
Share Sale: As the entity that owns the IP Asset remains the same, no further action needs to be done to transfer ownership. If you’re a buyer, just make sure that the company actually owns all the IP it says it does!
Asset Sale: As assets such as trade marks and patents are registered with IP Australia, when you’ve purchased this asset, the government body will have to be notified of the transfer in ownership. You’ll also need to make sure all IP assets that are part of the sale are properly defined in the contract of sale
Stamp Duty is a state and territory based tax that governments impose on the sale of assets. All of the states and territories have different systems, so you should get specialised tax advice on this.
It is usually the buyer who pays the stamp duty, so the amount may end up adding up! Here’s a table giving you a general idea of how the requirements are different from state to state.
|New South Wales||Stamp duty isn’t payable on business assets except on the transfer of land and real property assets (this includes leases).There may be a nominal fee payable on the sale of business agreement.|
|Victoria||Stamp duty isn’t payable except on real property assets.|
|Australian Capital Territory||Stamp duty generally isn’t payable unless it’s for real property assets (including commercial leases).|
|Tasmania||Stamp duty generally isn’t payable unless it’s for real property assets. Stamp duty applies to goodwill and IP if the business has serviced a customer or client, or used its IP, within 12 months of the business sale.|
|Northern Territory||Stamp duty generally is payable except in certain circumstances. There is also a broader application of stamp duty to IP assets: it applies to trade marks, patents, registered designs and copyright only if the business is carried on or will be carried on within the territory.|
|Western Australia||There is no exhaustive list as to what types of properties attract stamp duty. Generally, stamp duty is applicable to business assets, subject to certain exceptions – it includes goodwill and IP.|
|South Australia||Stamp duty is payable on the transfer of a business. It applies to the value of the assets located in the state, and includes goodwill and stock.|
|Queensland||Stamp duty is applicable to the sale of businesses, unless the sale solely involves debts or intellectual property.|
Share Sale: GST generally does not apply to the share sale price.
Asset Sale: If you’re registered for GST and you sell, transfer or dispose of a business asset, the sale is taxable and GST would need to be paid unless the going-concern exemption applies.
Share Sale: If the seller is a company, the buyer may be able to get a lower purchase price as the shareholders of the company are entitled to a general 50% CGT discount. This incentivises the share sale process for many business owners—particularly as, on top of the CGT, there are Small Business CGT Concessions.
Asset Sale: There is generally no CGT discount available for the disposal of business assets.
Deciding between a share sale and an asset sale can be a difficult decision—particularly with a range of factors to consider such as tax considerations or potential liabilities. It is important to do your due diligence before purchasing the business.
Whether you’re purchasing a company with multiple vehicles and stock, or an online business with a trade mark and domain, we’re here to help!
Depending on which avenue you decide to take, we can help from conducting due diligence to completing the legal documentation. Feel free to get in touch with us at firstname.lastname@example.org or on 1800 730 617 for a free, no-obligations chat.
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