Business Sales & Purchases

Asset sale versus share sale

A business can be sold as a bundle of assets (asset sale) or by transfer of shares in the company that owns the business (share sale). The choice has significant tax, duty and risk consequences.

• Asset sale. The purchaser takes agreed assets (equipment, stock, goodwill, contracts, intellectual property) without inheriting the vendor entity's liabilities. Contracts and leases usually need to be assigned or novated. Employees may be terminated and re-employed.
• Share sale. The purchaser takes over the vendor company as a whole, including its history, contracts and liabilities. Warranties and indemnities carry the burden of allocating historic risk.

Heads of agreement

A short document setting out the key commercial terms — price, structure, timing, exclusivity, confidentiality — before the sale contract is drafted. Care is needed on which parts are binding and which are subject to formal contract.

Due diligence

On the purchaser side, due diligence typically covers:

• Financial performance and normalised earnings.
• Customer and supplier contracts, including change-of-control clauses.
• Employees, including entitlements to be assumed.
• Premises lease and any assignment issues.
• Licences, permits and regulatory approvals.
• Intellectual property ownership and registrations.
• Tax and superannuation history.
• Litigation and known claims.

The sale of business contract

Key clauses include the purchase price and its allocation between assets, adjustments at completion, warranties, restraints of trade, assignment of contracts, transfer of employees, apportionment of rent and outgoings, and any earnout or deferred consideration.

Restraints of trade

Restraint clauses in a sale of business are treated more favourably by courts than employment restraints, because the purchaser has paid for the goodwill. However, they must still be no wider in duration, area and activity than reasonably necessary to protect that goodwill.

GST and duty

• Sale of a going concern may be GST-free where the statutory conditions are met and the parties agree in writing.
• Business assets attracting duty in Victoria include real property (as a separate transaction) and, in some cases, motor vehicles. Goodwill and plant and equipment do not generally attract duty.
• Share sales attract landholder duty where the target holds significant Victorian land, subject to threshold and control tests.

Employees

On an asset sale, employees do not automatically transfer. Typically the purchaser offers employment on comparable terms and the vendor terminates. Recognition of prior service under the Fair Work Act depends on the terms of the offer. On a share sale, employees continue with the target company without change.

Completion and post-completion

Completion involves signing, payment, delivery of documents and stock take (if applicable). Post-completion tasks include ASIC notifications for share sales, transfer of contracts, banking arrangements and running the restraint period.

Structuring the transaction

Business sales in Victoria are ordinarily structured as either a sale of business assets or a sale of shares in the company that operates the business. Asset sales transfer identified assets — goodwill, plant and equipment, stock, contracts, intellectual property, and leases — and leave liabilities with the seller unless specifically assumed. Share sales transfer ownership of the operating entity, which carries with it all assets, contracts and liabilities. The choice has significant tax, employment, contractual and risk consequences. Structuring should be decided with the parties' tax advisers before the heads of agreement are signed.

Heads of agreement

Most business transactions begin with heads of agreement or a term sheet recording the commercial terms — price, payment structure, conditions precedent, restraint of trade, indicative timing and exclusivity. A well-drafted heads of agreement records the commercial position without inadvertently creating a binding sale contract. We draft the heads of agreement to be clear about which provisions bind the parties (typically exclusivity, confidentiality and cost sharing) and which are subject to a formal contract.

Due diligence

The purchaser's due diligence typically covers financial information, tax lodgements, key contracts and their assignability, employee entitlements, leases, intellectual property ownership, regulatory compliance, litigation history, and any related-party arrangements. The seller's counterpart is preparing a data room and disclosures that anticipate those enquiries. Poorly organised due diligence extends the transaction timeframe and damages price by the time settlement approaches.

The sale contract

The sale contract records price and payment terms, the assets or shares being sold, warranties given by the seller, restraint of trade on the seller, treatment of employees, apportionment of outgoings, treatment of stock on hand, and the mechanics of completion. Warranties are typically limited by disclosure and by time and monetary caps. Restraints must be reasonable in scope, duration and geography to be enforceable. Employee provisions must address transfer of entitlements and the operation of Victorian long service leave.

Leases, contracts and consents

Assignment of a lease requires the landlord's consent and, in retail matters, compliance with the Retail Leases Act. Assignment of key supply, customer and finance contracts requires each counter-party's consent. Delays in obtaining consents are a common cause of missed completion dates. Consents should be requested early and pursued actively.

Completion and post-completion

At completion, purchase price is paid, transfer documents are exchanged, stock is counted, keys and passwords are handed over, and the transition of employees, systems and customers begins. In the weeks after completion we typically assist with adjustment of stock and outgoings, notifications to third parties, and the preparation of a completion account.

Where separate advice is required

Business valuation, tax treatment of the sale proceeds (including small business capital gains tax concessions), and the accounting for the transaction are matters for the accountant. Financial planning for the sellers post-sale is a matter for a financial adviser. We identify these questions and coordinate with those advisers.

Limitations of general information

Business transactions vary substantially in size, structure and complexity. This page is a general introduction and is not a substitute for advice on your transaction.