Are you looking at purchasing a business but don’t really know where to start? There are two different ways of selling a business that could have implications for you as the incoming purchaser:
- A company or share sale; or
- A business sale.
You may think to yourself, “these sound like the same thing”, but in reality, they are very different. Below, we explain these differences and their potential effects on your decision.
When someone looks to sell their company, it means they are going to sell their shares as well as the business they operate. A company is a separate legal entity that can own a business with a business name and the assets that a business uses in its functions.
For example, Greg has his company called GJ Pty Ltd. He owns 100% of the shares, and GJ Pty Ltd also owns a business name, Lacy’s Shoes. Lacy’s Shoes is a shoe store that GJ Pty Ltd operates. Greg decides he doesn’t want to have his company anymore or run a shoe store, and he wants to go live out his days in the Bahamas (lucky Greg!)
Greg then sells his 100% shareholding in GJ Pty Ltd to Beatrice. Beatrice then becomes the only shareholder and owner of GJ Pty Ltd. She is also the new owner of Lacy’s Shoes as GJ Pty Ltd owns this business name and the associated assets. This also means that Beatrice takes on all of the company debt and liabilities that are present when Greg left the company. This transfer of ownership is relatively complicated because Greg must make sure he complies with the requirements of ASIC when selling his shares.
Greg will want to enter into a Deed of Share Sale and Release with Beatrice that sets out the terms of the sale and releases him from all future liability to do with the company. He will then need to do the following:
- Complete a Share Transfer Form;
- Have a company meeting and Minutes of Resolution to allow the sale of shares;
- Complete the ASIC Forms for a change of shareholders and directors; and
- Issue a Share Certificate to Beatrice.
He will also need to resign as a director of the company and provide a letter of resignation to Beatrice. Beatrice will need to update the shareholders register and may also be required to pay stamp duty on her purchase of the shares. The landlord of the premises where Lacy’s Shoes operates also needs to approve Beatrice as the incoming tenant and guarantor.
With a business sale, the process is usually much more straightforward. If Greg decides he doesn’t want to operate Lacy’s Shoes anymore but wants to hold on to GJ Pty Ltd (he’s thinking of opening a scuba diving shop in the Bahamas), then all he needs to do is sell the business to Beatrice.
They will need to enter into a Sale of Business Agreement, which will set out that GJ Pty Ltd is selling the business name Lacy’s Shoes and the assets of the business to Beatrice. The business name will need to be transferred into Beatrice’s name, along with the assets. Beatrice will pay a deposit, usually 10% of the purchase price, and as with the company sale, the landlord must also approve Beatrice as the new tenant and guarantor of Lacy’s Shoes. The landlord cannot unreasonably refuse to transfer, or assign, the lease over to Beatrice.
After the Sale of Business Contract has been signed and the lease has been approved and transferred, the business sale will then be settled. This usually takes place a few weeks after parties have exchanged contracts allowing enough time for the transfer of the business name, assets, lease, etc. At this point, Beatrice becomes the owner when she pays Greg the purchase price and finalises the sale.
Now that you know the differences between a company and business sale, you can better decide which sale is right for you when purchasing a business. It’s important to seek legal advice through the sale process to make sure you are aware of your obligations and negotiate terms most favourable to you and your business. If you have any questions, get in touch with our sale of business and share sale team.