In our earlier article we set out some of the key issues a Seller must consider when looking to sell their Business. In this article, we consider how you need to organise the assets for sale.
Who Owns the Business Assets?
The starting point is to confirm what structure you actually use to operate the Business. This might sound like an odd question, however, it is not unusual for some Businesses to hold assets in separate trading entities as part of a consolidated group. For example, the lease may be held in one company, the Intellectual Property (trademark, business name, website) is held in another and the plant and equipment held with another entity.
For each of the entities that own the assets, are they ready to sell? Have they categorised the assets they hold for sale? Do they have proof of ownership? If the assets are subject to warranties or other protections, are these up to date? Are there any known issues with the assets being sold or the entity trying to sell the asset? For example, are there proceedings against the seller? Is the seller still trading? Lots of questions for which consideration must be made before placing the Business up for sale.
Another issue to think through is whether the Seller has all of the decision rights when selling the Business. For example, are there other owners who need to approve the sale? Are there rights of pre-emption or approval for sale required under a Shareholders Agreement? Are there any material contracts that will need to come across to the buyer? Will the counter party to the material contract need to approve the buyer?
Most of the answers to the above questions are a straightforward response, however, when the answers are not straightforward, the Seller needs to consider what steps it needs to take to fix up the problem or otherwise explain the issue in a cogent and proper way to any prospective buyer. Remember, most buyer’s will do their own due diligence and if something is found in that process for which the Seller has kept quiet, it will very likely ruin any deal.
Do We Sell Via An Asset Sale or a Business Sale
Most businesses operate via a company structure. Given this, in most cases, a Seller has a choice as to how they sell the business. The key question is whether you will sell the business via an asset sale or as a share sale.
An asset sale is where the business assets are sold to the buyer and a share sale is where there is a transfer of the ownership of the company that owns the business assets.
Most business sales are asset sales rather than share sales. The main reason being the risk of inheriting debts and liabilities if you acquire the operating entity as opposed to the assets free of debt. Notwithstanding this, share sales still take place, principally for practical and taxation purposes.
From a practical standpoint, share sales are sometimes preferred when key assets can’t be easily transferred from Seller to Buyer. In relation to taxation, a Seller may prefer a share sale to maximise capital gains tax concession (such as CGT discounts). From a Buyer’s perspective a share sale could be preferred so as to maintain key contracts in the business or otherwise access retained tax losses. As always, when considering a sale of a Business, a Seller should always seek competent tax advice before considering a sale.
Before You start the process to sell, a Seller must think through the key elements of the sale and how they want to sell the Business. Lack of forethought can not only make the sale look haphazard but could also jeopardise a potential sale.
If you would like to discuss a Business Sale & Purchase or require more information please contact our team.
Written by Cameron Spanner.