Buying or selling a business can be an exciting and daunting process. you will need to find prospective buyers or the appropriate business to acquire, prepare the business for sale and complete business valuations.
Author Matthew Yarrow
But perhaps more important, and often overlooked, is the need to consider how to best structure the sale/purchase of the business so that it is as attractive as possible and will extract the most value for both seller and buyer.
If the business operates in a company, it is possible to sell the business and assets from within the company (Business Sale) or alternatively, sell the shares in the company to transfer the entire ownership of the company including all assets and liabilities held by the company (Share Sale). There are various pros and cons for each option, which will need to be weighed up to ensure the optimal outcome for all stakeholders. While there are many considerations in choosing a sale/purchase structure, below we take a look at four of the most important considerations through the lens of both vendor (seller) and buyer;
- Exposure to Risk
- Income Tax Considerations
- Transfer Duty Considerations
- Administration & Business Operations
Vendor Considerations
Exposure to Risk
Under a share sale, the entire company is transferred to the purchaser. The buyer will thus receive all of the existing assets and liabilities of the company, including all the history of the company. To mitigate risks associated with a company’s history, a vendor is often requested to provide an indemnity for any exposures that arise post sale as a result of activities prior to sale. Any request for an indemnity needs to be discussed with a solicitor as part of the contract negotiations to ensure adequate legal advice is obtained.
Under a business sale, only the business is transferred to the buyer from the company. Any existing issues with the company will remain with the company (and therefore vendor).
Income Tax Considerations
Income tax is often a large consideration for vendors when they are weighing up a sale price as the after-tax proceeds are what is most critical to a vendor in this situation.
The main income tax concern for the vendor is the potential tax liability on the capital gain on the sale. There could be a 50% general capital gain discount available for the disposal of company shares (depending on shareholding structure). The 50% general capital gain discount is not available to companies, so a company selling the business would not eligible to obtain this discount. This is a significant advantage for a share sale over a business sale.
In addition to the general capital gain exemption, there are a range of small business capital gain concessions that could be available. The small business CGT concessions are a lengthy topic in themselves, however extracting tax free components under these concessions are arguably more problematic in a business sale.
Transfer Duty Considerations
Any transfer duty is usually payable by the purchaser. The transfer duty has been reviewed further under the buyer considerations.
Administration & Business Operations
The administrative work for the vendor will vary with each business and the requirements should be outlined in the sale contract. The contract will cover items such as who is responsible for collecting outstanding debtors, paying creditors, dealing with employee agreements and removing guarantees provided by the director.
If shares are sold, the company is also transferred to the purchaser. This negates the need for a vendor to deregister the ABN, GST and PAYG registration and finalise associated company tax lodgement paperwork.
If the business is sold, the employees may be transferred across to the purchaser. The obligations of any accrued employee obligations should be reviewed with the solicitor and factored into the sale price. The existing company will remain with the vendor. The outstanding tax lodgements and tax registrations will need to be cancelled where necessary.
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Buyer Considerations
Exposure to Risk
Under a share purchase, the entire company is transferred to the buyer. As a result, the buyer will receive all of the existing assets and liabilities of the company. This will also include any unknown history of the company such as any existing legal issues or outstanding debts of the company. A buyer can request that the vendor provides an indemnity with the sale of a company for any existing issues to mitigate the buyer’s risks. This must be reviewed with a solicitor as part of the contract negotiations.
Under a business purchase, only the business is transferred to the buyer. Any existing issues with the company will remain with the vendor. A business purchase is generally preferred for the buyer as there are less risks transferred to the buyer.
Income Tax Considerations
The buyer also has tax considerations when deciding on how to structure the transaction.
If the shares are purchased, the entire company, along with any tax history is transferred to the buyer. The buyer will receive any available losses or franking credits that are held in the company. The losses may or may not be able be utilised by the buyer to offset future income. This should be reviewed with an accountant to determine if they can be used and calculate any tax benefits available. There are critical tests that must be passed in this regard, so advice is essential.
Any outstanding ATO debt or poor lodgement history will also be transferred to the buyer under a share purchase. The lodgement history is usually reviewed as part of the due diligence to gain some comfort around any outstanding tax issues.
A business sale would generally be preferred by a buyer if the company has a history of tax issues, or there is insufficient information available around the lodgement history to review the potential risks.
Depending on how a share purchase is structured, then it could bring tax consolidation into play. This is another complex topic and there could be various pros & cons to this depending on the circumstances.
Transfer Duty Considerations
The purchase of shares generally does not attract transfer duty in any of the states or territories. There are exceptions, such as if the company holds land so this should always be reviewed with a solicitor.
The purchase of a business may result in transfer duty depending on the State that the business is based and where the business generates its income. If the business operates in several states, the stamp duty will need to be calculated for each state.
Comparing a share purchase to a business purchase for transfer duty can be a complex issue, and must be reviewed with appropriate professionals, but there can often be a duty saving by acquiring the shares of a company as opposed to buying a business.
Administration & Business Operations
If the shares are purchased, any existing bank accounts, finance agreements, bank loans, payment employee entitlements, insurances, etc will transfer to the purchaser. Similarly, company registrations such as tax file number, Australian Company Number (ACN), GST registration (if applicable) or business name will also transfer. Any existing employees usually remain with the company and are transferred to the new owner.
If the business is purchased, the buyer will need to complete all of the above administration, operational and registration tasks. Additionally, employees will not automatically transfer. The business name is often included in the transfer sale as part of the purchase contract.
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Buying and selling are critical points in the lifecycle of a business so it is important that appropriate advice is sought before you acquire or sell a business. If you are considering your options as a vendor or purchaser, enlist our expertise to help step you through the considerations most relevant to you. To discuss your needs please feel free to get in touch with one of the team at Hoffman Kelly on (07) 3394 2311 so that we can assist with any questions.
