Planning your business sale: Getting the sale structure right

You have made the decision to sell your company or business. But ask yourself, what is it that you are selling? Is it the shares in the company or is it the underlying assets and/or business? Where is the underlying value in the business that will attract potential buyers?

Getting your sale structure correct is something that should be addressed with your advisors well before commencing a sale. The extent to which your advisors (be it financial, accounting or legal) will be able to add value at this stage will be, in part, a function of the time you give them.

If you come in last minute, there is only so much value an advisor can add. This is especially true in relation to the tax consequences of a sale, discussed below.

 Key Considerations

 Some of the key considerations when making the decision to sell the shares or business assets are:

 1.     Are you selling all or part of the business?

Consider whether your buyer will more likely want to cherry-pick assets or long term contracts (for example a competitor looking to leverage an established structure) or only buy a division of the business?

From a seller’s perspective is their valuable property that you want to retain to continue to earn passive income from.  For example, intellectual property that you can licence or a premises you can lease to the new owner.

 2.     What will the tax consequences of the sale look like?

 What you receive in purchase price and what you pocket after tax are two very different amounts.

Consideration of the tax consequences should be considered early as part of the broader commercial rationale for the transaction structure, to avoid enlivening Part IVA of the Income Tax Assessment Act 1936 (Cth).

There are a range of tax concessions that are available to small business owners, which can eliminate or reduce a capital gain arising from a sale for a seller.

Apart from the 50% CGT discount that is available to individuals and trusts on the sale of CGT assets such as shares, goodwill or land, a small business with less than $2m income or $6m in net assets may also be eligible for various small business CGT concessions (if the taxpayer satisfies the conditions for relief).

For example (if you satisfy the conditions which are technical so get tax advice) the 15-year small business exemption eliminates a CGT gain if you have continuously owned an active asset for 15 years and you're aged 55 or over and are retiring or permanently incapacitated.

For a buyer, buying shares will generally incur less stamp duty (unless the company is land rich) than a business sale.

 3.     Skeletons in the closet?

In buying the shares in a company, a buyer will inherit all its liabilities (such as unpaid taxes, contingent liabilities, unsettled litigation).

Although warranties and indemnities can be provided to mitigate these risks for a buyer, where the risk of a future claim is high (e.g. where the company has taken an aggressive tax position and may be subject to tax audit or been involved in high risk activities such as asbestos removal) the buyer may want to err on the side of caution and buy the assets or business and not the shares in the company.

For transactions above $5m, this risk could be put onto an insurer by taking out a warranty and indemnity insurance policy, which would typically cost up to 5% of the purchase price (depending on the size and risks involved in the transaction).

4.     Will there be difficulty in obtaining 3rd party consents on key agreements?

In a business purchase it is important to review key contracts including contracts with customers, suppliers, banks and landlords. Unlike a share sale, all these contracts will have to be assigned or novated to the incoming buyer, with the consent of the other-party or otherwise new contracts may need to be entered if important to the business.

If there are a large number of key contracts, the task of obtaining consents to transfer contracts might be prohibitively expensive and time consuming. Whereas when buying shares, unless change of control/ownership provisions are triggered in the contracts, there may be fewer consents to the transaction required (because the contracting party remains the same).

If you require assistance getting transaction ready, or for further information please contact:

Anthony McFarlane
Principal Lawyer
T: 02 6041 0777
M: 0408 531 483
E: amcfarlane@ha.legal