There are two common ways to sell in a business sale. It is important that you understand the differences between them because the process and associated risks involved vary between the two. A basic understanding will allow you to highlight the strengths of your business and repair or minimise the risks. 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 shares changes.

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. This can include: 

  • 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. This means that the business assets do not change ownership, as they continue to be owned by the company. The ownership change occurs by way of the shares being sold from the current shareholder to the buyer, who will own the shares of the company after the sale has completed. 

The terms are sometimes used incorrectly and it is important you have discussed the process, rather than just the term. When discussing the type of sale, make sure that you have considered both of your options. Sometimes the option that is best suited can be different for you and the buyer. This means that you may have to be flexible. 

What Is the Business Sale Process? 

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. 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% (Signing/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 completes. If there are several key contracts used in the operation of the business, it is important that you ensure these can be transferred. 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. 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 is signed prior to considering the buyer as a tenant, which can be frustrating if they end up blocking 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 trademarks);
  • 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 consents are necessary, which can result in a simpler process. 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. 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 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. Importantly, the company profits, debt and liabilities present when Larry left the company will remain with the company.

Key Takeaways 

It is important that you have discussed in detail the type of sale you wish to complete. You should consider the contracts that are used in the operation of your business. If there are many contracts to transfer and you own the business through a company, then a share sale may result in a smoother process. All contracts should also be examined for ‘change of control’ clauses as consent may still be required in a share sale. If you have any questions about buying or selling shares or a company, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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