Thinking of buying a business, but don’t know where to start? Are you afraid you might be biting off more than you can chew? Do not worry, this article will cover the key questions to ask when buying a business.
Tax, Debts and Liabilities
For purchasing a business, the two main questions to ask are whether I should purchase through an asset sale or a share sale? Your answer to this question depends on your situation, as different tax obligations and liabilities apply to each. This article will list the benefits and negatives of both options below.
Asset Sale
In an asset sale, you buy the business’s assets. For companies, the assets belong to the company itself, so ownership shifts from the company to yourself. For partnerships and sole trader businesses, assets are owned by the partners or the sole-trader, and therefore assets pass from them to you.
The benefits of an asset sale are:
- For companies, buying assets does not change ownership. Therefore, the assets are controlled by you, without having to buy the company itself through share purchasing. This means the company’s debts and liabilities stay with the company, it does not transfer to you.
- The assets may be sold as a going concern. This means you can avoid paying GST. However, the asset must be used for producing goods and/or services that include GST.
The negatives of an asset sale are:
- For transfer of real property, stamp duty is applicable.
- Certain assets may not be transferable, as creditors hold an interest over the property or its a type of asset, such as a government licence, that cannot be transferred.
Share Sale
In a share sale, you are buying the majority of the company’s shares. Effectively, you will own the company or at least own enough of the company to control its actions.
The benefits of a share sale are:
- Stamp duty does not apply unless the business is land rich.
- All the employee, supplier and customer contracts remain. You can continue running the business undisturbed.
- You effectively own the company, therefore you benefit from the company’s goodwill – the company’s brand and reputation.
The negatives of a share sale are:
- You will acquire all debts and liabilities from the business. You own the business, therefore you also own its debts.
- You can get the seller to indemnify any business debts before sale, but the seller may not have the money by the debt’s due date. Therefore, you still must pay.
- Some agreements need third party approval when an ownership change happens. This can be difficult to get, which may prevent these agreements from carrying over.
- Government licences and other related property is unassignable, therefore, you do not own these after sale.
Due Diligence
Due diligence describes the process of checking everything inside and related to the business. It is important for asset sales, but absolutely necessary for share sales. The process involves having access to all business materials from contracts to bank statements. You must know about all debts and liabilities so that in a share sale, you know what debts you are taking over. You can then have the seller indemnify you for these debts, just make sure the seller allocates money to pay these debts in a separate account. This ensures that when the debts are due, the seller will pay. You should always consult a company lawyer to help navigate the process.
Choosing between an asset sale or a share sale is hard. One is not better than the other. Your situation will determine which one to choose. All these questions are important elements when thinking about purchasing a business. You need to know the legal implications of both, which is why legal advice is essential.
Want to know more? Contact a LawPath consultant on 1800 529 728 to learn more about buying a business and to obtain a fixed-fee quote from Australia’s largest legal marketplace.
