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There are two common ways to sell your business. It is essential to understand their differences because the process and associated risks involved vary. Thus, a basic understanding will allow you to highlight your business’s strengths and repair or minimise the risks. To list, you can either sell your business through a:

  • business sale; where the business assets change ownership; or
  • share sale; where the business is owned by a company and the ownership of the company’s shares changes.

However, there are advantages and disadvantages to both methods. Additionally, there may be circumstances where one is not possible (for example, because a business is owned by a sole trader or partnership and not a company). This article discusses the characteristics and differences between a share sale and a business sale and what you should know when undertaking either. 

Business Sale 

A business sale, or asset sale, refers to the sale of the business assets from the current owner to a buyer. The seller and buyer can be different entities (such as a sole trader, company or trust), but the distinctive feature of an asset sale is that the business assets change ownership. For instance, this can involve: 

  • all of the assets used in the operation of the business, referred to as a ‘business sale’; or
  • only some assets, referred to as an ‘asset sale’. 

Share Sale 

A share sale involves the sale of the shares of the company that owns the business. Therefore, this means that the business assets do not change ownership, as they continue to be owned by the company. Instead, the ownership change occurs through the shares being sold from the current shareholder to the buyer, who will own the company’s shares after the sale has completed. 

The terms are sometimes misused, and you must ensure you clarify the process in detail. Therefore, when discussing the type of sale, make sure that you have considered both of your options. Sometimes the best-suited option can be different for you and the buyer. This means that you may have to be flexible. 

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What is the Business Sale Process? 

Next, a business sale can be more complex from a process perspective as you need to transfer all of the business assets, including contracts, to the buyer. To explain, transferring contracts involves obtaining the consent of the other parties to the contract. This applies to leases, franchise agreements, employee agreements and client agreements. The type of business will determine the other steps and documents required, but the typical process is that the: 

  1. seller’s solicitor prepares the draft business sale agreement (BSA);
  2. BSA is negotiated between the seller and buyer, with advice from their solicitors;
  3. BSA is signed, and the buyer pays a deposit, typically 10% (for signing or execution);
  4. conditions precedent are completed (these are the necessary steps between signing and completion); and
  5. purchase price is paid and business assets are formally transferred to the buyer, known as settlement.

Conditions Precedent

Conditions precedent are events that must occur before the sale can complete. These usually relate to the transfer of business contracts. This is because the business owner is changing, which means the parties listed in the various contracts will be different after the sale. If there are several key contracts used in the operation of the business, you must ensure these can be transferred.

For example, if there is a lease, which is a type of contract, you will require the consent of the landlord to the buyer becoming a tenant. You, the buyer and the landlord will need to enter a deed of assignment to transfer the lease. However, if the landlord or party to another key contract refuses to transfer the contract to the buyer, this can frustrate and block the sale process. The landlord may still require that a BSA be signed before considering the buyer as a tenant, which can be frustrating if they block the sale. 

Example of a Business Sale

Larry wants to sell his landscaping business Urban Landscaping, but he does not want to sell his company. Instead of selling his shares in LL Pty Ltd, Larry will only sell the assets of the Urban Landscaping business. Harriet is interested in buying the business and agrees with Larry that LL Pty Ltd will transfer the Urban Landscaping business and all associated assets to her to operate the business as a sole trader. They enter a business sale agreement that sets out that Larry will transfer Urban Landscaping’s:

  • business name;
  • equipment;
  • intellectual property (including any trade marks);
  • business contracts; and
  • client list.

What is the Share Sale Process?

In a share sale, the business assets (including business contracts) remain with the company. This means that no consent from third parties is necessary, resulting in a more straightforward process. Furthermore, this also means that all employees will continue to be engaged by the company. The exception is where there is a ‘change of control’ clause in the contract. This means that consent is required when the company shareholding changes. For example, this is common in government contracts, leases and franchise agreements. In this case, you will need to go through a similar process as under a business sale. The formal agreement is a share sale agreement, which sets out the:

  • number of shares being purchased;
  • price per share; 
  • warranties you are providing; and 
  • other obligations relating to before or after the sale has completed. 

In addition, you will need to: 

  • execute a share transfer form to contractually transfer the share ownership;
  • pass a shareholder and board resolution to allow the sale of shares and update the directors and secretary;
  • update the company’s register of shareholders and issue share certificates to the new shareholder; and
  • update ASIC as to the change of shareholders and directors within 28 days. 

Example of a Share Sale

Larry owns all of the shares in a company called LL Pty Ltd. Larry is the sole director and shareholder of the company. The company owns a landscaping business called ‘Urban Landscaping’ that Larry wants to sell. The assets associated with Urban Landscaping are the only assets owned by LL Pty Ltd.

Larry meets Harriet, who wants to buy Urban Landscaping. Through a share sale, Harriet replaces Larry as the sole shareholder and director of LL Pty Ltd. Since LL Pty Ltd owns all of the assets associated with operating the business, Harriet now controls Urban Landscaping. Any current employees remain with LL Pty Ltd and are practically unaffected by the change in company ownership. Notably, the company profits, debt and liabilities present when Larry left the company will remain with the company.

Business Sales vs Share Sale

The following table outlines four key differences between a business sale and a share sale:

 

Business Sale

Share Sale

 

Company Ownership

Company ownership remains unchanged. The ownership remains with the existing shareholders. 

Ownership of the company has transferred to its new shareholders. 

Asset Ownership and contracts

The assets and contracts of the business need to be transferred to the buyer.

The assets and contracts remain in the name of the company and do not need to be transferred.

Liabilities

Generally, the only liabilities that pass to the buyer are those attached to the specific assets that were sold.

All assets and liabilities which are in the name of the company remain with the company (meaning the buyer who now controls the company is responsible for those assets and liabilities).

Employees

As the employer has changed, existing employment contracts will need to either be: a) transferred (through ‘novation’); or b) terminated and drafted afresh by the new owner.

The employer of the existing employees has not changed. Therefore, existing employees remain employed. However, the new owners can choose whether to keep the existing employees or not.

Key Takeaways 

You must discuss the type of sale you wish to complete in detail. You should consider the contracts you use in the operation of your business. If there are many contracts to transfer and you own the business through a company, a share sale may result in a smoother process. Furthermore, you should also examine all contracts for ‘change of control’ clauses as consent may still be required in a share sale. 

If you need help with buying or selling shares or a company, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Can minority shareholders prevent a share sale?

The answer depends on whether the company’s shareholders agreement contains drag-along rights. Drag-along clauses allow a majority of shareholders to force a minority of shareholders to sell their shares when selling the company to a third party. Usually, the shareholder’s agreement will specify the majority required to invoke the drag-along right (a majority threshold is typically between 51% and 90%). 

Can you leave out the minority shareholders from the share sale?

Again, this depends on whether your shareholder’s agreement contains tag-along rights. Suppose a minority shareholder has not been offered to join the share sale or is not provided notice. In that case, tag-along rights allow them to tag along with the majority shareholders and sell their shares on the same terms to the same purchaser. 

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