Mergers and acquisitions [M+As] are terms often used interchangeably but differ substantially in meaning.

In a merger, two or more entities come together to form one new business.

An acquisition, on the other hand, relates to an entity acquiring another entity. This is commonly completed by either purchasing ownership of the target share capital or by taking over the assets of the company.

Over the next few weeks, we will unpack the main steps in completing a successful M+A, from structuring the deal, pre-contractual considerations, and getting the contract right [including key terms] all the way down to completion.

The following Part 1 will focus on how to structure the deal in acquisitions, unpacking the difference between a share purchase and an asset purchase and discussing the advantages and disadvantages of each.

 

share purchase or asset purchase?

One of the key considerations when looking to acquire a business is how the deal should be structured.

Typically, there are two options:

  • Purchase the shares in the company comprising the business (Share purchase); or
  • Purchase assets of the business from the company itself (Asset purchase).

 

what’s the difference?

An asset purchase, as the name suggests, involves the purchase of some or all of the assets owned by a company, while leaving ownership of the company itself with the seller.

Typically, these will include assets such as goodwill, current supply contracts, plant and equipment, interests in land [e.g. leases], stock-in-trade and intellectual property.

Conversely, in a share purchase, the purchaser buys some or all of the shares in the company, taking over the company itself (and therefore ownership of all of its assets and liabilities).

 

what are the advantages and disadvantages of each?

Each option brings with it certain advantages and disadvantages for each party, so it’s always important to consider the circumstances of each case to determine which option is most appropriate.

The following is a summary of some of the pros and cons of each option:

asset sale

seller advantages

  • Typically, a seller provides fewer warranties and indemnities in an asset sale as liability for any future acts of the business lie with the purchaser.
  • Certain assets may be able to be excluded from the sale where the seller wishes to retain them for other purposes.

seller disadvantages

  • Many assets of the business such as contracts, property and equipment leases will need to be transferred to the purchaser which can be a cumbersome process. Further, the consent of third parties may be required to complete any assignment.
  • The liabilities of the business generally remain with the seller.

purchaser advantages

  • Usually, the liabilities remain with the seller company and do not transfer to the purchaser.
  • Greater flexibility in the purchaser often being able to reject certain contracts, items of stock or equipment, or may be able to terminate the employment of any unwanted employees as a condition of settlement.
  • The sale may qualify as the sale of a ‘going concern’ which may result in no GST being payable on the transaction.

purchaser disadvantages

  • Stamp duty may be payable on the transfer of the business assets, as well as any land and other property interests.
  • Third parties may refuse to consent to assign contracts which may jeopardise the settlement of the sale or devalue the business itself.

share sale

seller advantages

  • Many tax concessions may apply to the transaction which are beneficial to the seller. For example, GST is generally not payable on the sale of shares.
  • As the ownership of the company [rather than of the assets] is changing, there is no need to separately assign contracts or leases as is the case with an asset purchase.

seller disadvantages

  • Since the company retains all historical, actual, and contingent liabilities of the business, to protect against these liabilities, the seller may be required to provide extensive warranties and indemnities. These warranties [unless limited] could be required for a significant period.
  • The directors of the selling company may be required to provide personal guarantees which may expose them to [often unlimited] personal liability.
  • Part of the purchase price may need to be held back as a surety for a period to compensate the buyer for any warranty breaches.

purchaser advantages

  • Where the company has recognised brand, goodwill, and reputation, it may be preferable to buy the business by way of a share sale in order to capitalise on the company’s brand, goodwill and reputation.
  • As contracts, business names, leases and intellectual property are already in the name of the company, there is no need to formally assign contracts and other property and therefore third-party consents are typically not required.
  • Stamp duty is generally not payable in a share sale.

purchaser disadvantages

  • The company retains all past, current, future and contingent liabilities of the business on completion [including any tax liabilities of the company].
  • Even if the seller provides an indemnity and financial security for the liabilities incurred by the company up until the date of completion, there is the risk that the seller may not have the funds to indemnify the purchaser when called upon to do so.
  • To minimise the additional risks associated with a share purchase the purchaser usually must engage in detailed due diligence to ascertain any liabilities and risks associated with the selling company which can often be costly and may result in significant delays.

 

deciding how to sell your business

Although there are advantages and disadvantages for purchasers and sellers associated with a share sale and asset sale transaction, there are ways to mitigate risks that are associated with each type of transaction.

The best thing that you can do is to get the right advice regarding the commercial, tax, and legal risks associated with both types of transactions, so that you are best placed to choose the most suitable type of transaction for your purchase.

 

tax, duties and other implications

Stamp duty and Capital Gains Tax [CGT] have different implications for both the purchasers and sellers depending on whether a transaction progresses as an asset sale or a share sale. We highly recommend you seek specialised tax advice in this regard to determine the tax implications applicable to your circumstances. We make the following general statement as guidance:

  • Stamp Duty: Stamp duty is a state and territory tax that is imposed on the sale of assets, payable by the purchaser. Noting each state is different, subject to specific legislated concessions and exemptions, in Queensland stamp duty is payable to the sale of Queensland business assets.Stamp duty is generally not payable on the transfer of shares in a Pty Ltd company unless that company holds more than $2 million of Queensland land.
  • Capital Gains Tax: A share sale and an asset sale also can result in a different CGT impact for a seller. The nature of the transaction will impact the cost base and depending on the selling entity certain CGT discounts may not be available.
  • Goods and Services Tax: Although the sale of a going concern and the sale of proprietary company shares are not subject to GST, the sale of a business that does not meet the requirements of the going concern exemption will attract GST.
  • Income Tax: Depending on the structure of the transaction, you may also have income tax implications. For example, if you need to pay out a dividend before transferring shares in the company, this may have income tax implications relevant to your considerations.

We highly recommend you seek specialised tax advice to determine the tax implications applicable to your circumstances.

 

Originally authored by Brendan McGrath.

 

we’re here to help!

If you would like further guidance as to your options, please contact our legal team on 1300 BDEPOT or oneplace@businessdepot.com.au.

In part 2 of this M+A series, we cover non-disclosure and confidentiality agreements. You can check out our full merger and acquisition blog series here.

 

general advice disclaimer

The information provided on this website is a brief overview and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision. Please consult with an appropriate professional before making any decision.