Buying A Business - Asset Sale vs Share Sale

Whenever the topic of buying a business is discussed, the conversation eventually turns to how to structure the acquisition.

It’s not just a case of which business is best in Australia to buy.

This essentially refers to whether the assets of the business are purchased or whether the shares in the company holding the assets are purchased.

Each option has its own pros and cons and there’s no right or wrong answer.

But being aware of the implications of each can go a long way to helping you choose the right option and ensure you have the right operating structure moving forward.

What Is An Asset Sale vs Share Sale?

With an asset sale, all the assets of the existing business are transferred into a new legal structure formed to operate the business.

Think of it similar to moving house.

You pack-up all your furniture and transfer it to the new house you’ve bought, unpack it and over the coming months things settle down and your furniture starts to look good in your new house.

Contrast this to a share sale where you simply buy the existing shares in the company operating the business.

In this scenario, the business simply continues as it did before, albeit with new owners.

Like someone buying a fully-furnished house to live in.

From this brief explanation you might conclude that buying shares in an existing company may be the way to go.

It certainly sounds simpler!

But as with everything in life, digging deeper can unlock important points you need to consider.

Factors To Consider With An Asset Sale vs Share Sale?

So what are the important points to consider when looking at an asset sale vs share sale?

Legal Liability

By establishing a separate legal structure and buying the business’ assets, you’re drawing a line in the sand between actions undertaken by the vendor and operations going forward.

As a new entity is undertaking operations, it can’t be held liable for past actions.

Contrast this to simply buying the shares in an existing company where it is likely you will also be the new director.

Any action against the company will most likely have the director included in that action.

Even if you as the new director were not party to something that occurred years ago, you may still potentially be liable.

And as a director, you are also personally liable for a number of debts of the company, if not paid.

In Australia, a number of business acquisitions are structured through new legal entities to deal with the risk aspects associated with a past business’ endeavours.

Having said that, there are a number of legitimate reasons why someone may wish to purchase the shares in an existing company.

It may be that the company holds valuable registrations, licenses or tender contracts which would need to be reapplied-for if the business was transferred into a new entity.

The main point to consider with this factor is that if purchasing the shares in a company operating an existing business, you should ensure your due diligence of all company matters is adequate.

This is where having the right lawyer and business accountant for buying a business can help.

Costs

As an asset sale implies establishing a new legal structure, there will be costs in setting this up.

Registrations such as ABN, GST, TFN will need to be undertaken.

A new bank account in the name of the new entity will also need to be established.

Of particular importance is that Stamp Duty may be payable by the purchaser, on the transfer of the business assets. This in itself could be a significant cost.

With purchasing shares in the operating company, the same legal structure continues. The same registrations and bank account also continue to be used.

As an asset sale generally requires more funds available in order to establish it to a sustainable level, the purchaser will need to ensure sufficient funding lines exist.

Working Capital

By undertaking an asset sale, the buyer of a business will need sufficient cash to fund operations for a period, until the normal cashflow cycle kicks in.

Purchased inventory needs to be sold to generate cash.

Wages and other fixed costs still need to be paid, independent of the timing of sales.

With the purchase of shares in an operating company, you gain access to the company’s bank account, funding lines and existing cashflow cycle.

Whilst an asset sale may require more costs associated with a thorough due diligence to determine a business’ working capital and cashflow cycle, than a share sale would, this can provide important information in relation to how long any initial funding will be required.

Customers

No matter what structuring options are eventually undertaken, minimal disruption to existing customers is paramount.

An asset sale may necessitate new customer agreements being put into existence.

Similarly, new supplier and employee agreements may be required.

Whilst this is very important and required, it merely highlights to various parties that the business has been transferred and sometimes provides the impetus for people to consider whether or not to remain with the business.

With a share sale, customers, suppliers and staff all remain with the existing company.

Whilst notification of the new owner may be required by various parties, the transition process can be less invasive than for an asset sale.

For any business sale, the less disruption the entire process creates, the greater the chance that the post-acquisition period will be commercially sound for the purchaser.

Summary

There’s no right and wrong answer for how to structure a business acquisition.

An asset sale or share sale can work very well in the right circumstances.

However, it starts with being aware of the implications associated with both.

And given that nothing in this article is legal or financial advice, you should always speak to your accountant or lawyer about these matters and what’s best for your circumstances.

Buying A Business - Asset Sale vs Share Sale