Buying & Selling Businesses Blog Series - Part 2 - The Structure of the Transaction

Posted by Malcolm Campbell, Luke Mitchell on 11 February 2016
Buying & Selling Businesses Blog Series - Part 2 - The Structure of the Transaction

When considering the sale or purchase of a business, it is important to consider whether it should be a sale of the business (which will comprise a collection of specific assets and specified associated liabilities), or whether it be a sale of the entity which owns the business (namely the company or trust).

 

 

Relevant considerations include, but are not limited to:

  1. if the vendor is a company or trust whether it has assets other than the business to be sold;
  2. whether the purchaser is prepared to accept all the liabilities of the company, and rely on its due diligence enquiries and the vendor's warranties (sale of shares) or would prefer the comparative certainty of assuming only specific liabilities (sale of business);
  3. taxation consequences for the vendor and the purchaser (e.g CGT and GST consequences);
  4. stamp duty consequences given that duty on business sales is generally higher than on share sales; and
  5. employee entitlements which may be crystallised, for example redundancy and long service leave obligations.

Whilst we have focused on the issues relating to the sale of the business assets and not a sale of shares of a company, it is important to consider the advantages and disadvantages of structuring the transaction as a sale of business which include:

Advantages

When buying the business, a purchaser will acquire:

  1. an existing customer base and existing contracts;
  2. existing suppliers;
  3. existing plant, equipment, stock and material;
  4. knowledge of the business from the current owner (particularly if the owner will be engaged as an employee or consultant for a period following completion);
  5. established premises (to the extent that such premises exist and are necessary for the conduct of the business);
  6. goodwill associated with the name and location of the business; and
  7. financiers may be more willing to lend money to assist in the acquisition of an existing business with a trading record.

Disadvantages

When buying a business, a purchaser must assess:

  1. preservation of the goodwill or reputation of the business;
  2. employment issues including the departure of key individuals from the business;
  3. inheriting plant and equipment that is obsolete or faulty;
  4. the business may have no real intellectual property that is transferable or the business may have failed to adequately protect its intellectual property; and
  5. the cost of acquiring goodwill may be too high.

Next up we look at pre-contractual negotiations.

Back