Business transfers happen regularly in Australia, and can take many different forms. Businesses may be bought and sold on the open market, transferred to children or other family members, or restructured resulting in a transfer from one legal entity to another. They may be transferred in one complete package, or they may be split up and transferred in several different parts.
From a legal perspective, there are also several different ways that a business transfer can be conducted. These may have different consequences in relation to such matters as taxation (including capital gains tax), liability in the event that the business is sued, and existing business arrangements (such as supply contracts or leases). There are advantages and disadvantages to each option, so what works for one business may not work for another. Therefore, it is important to consider the various options that are available, and be clear about what you are trying to achieve with the business transfer.
Business transfers are complex matters, and contain a lot of variable factors which may significantly affect your legal status. Therefore, if you have any concerns or uncertainty about your own situation, seek professional legal and accounting advice. This guide provides a general overview of these matters but is not a substitute for professional advice.
In order to really understand the concepts which we are going to discuss in this guide, it is important that you first get a clear idea of what we mean by the term "business".
The term "business" is used loosely in Australia, but in reality, a "business" in and of itself is not a legal entity. Rather, the business is the collection of assets, which the owner of the business uses to generate profit. For example, this collection of assets might include business equipment (such as vehicles or machinery), websites, Facebook pages, employee contracts, uniforms, leases, service contracts, licences (such as liquor licences or food licences) client lists, business names, logos, other intellectual property, or any other variety of physical, digital or other assets.
A business may be owned by an individual person, by a partnership, by a company, or it may be owned through a trust structure.
In Australia it is possible to register a business name and to obtain an Australian Business Number (ABN). However, this still does not mean that the business is a legal entity. This just protects the business name, and allows the owners to collect Goods and Services Tax (GST).
These are the two main ways that businesses may be transferred in Australia.
An asset transfer (or asset sale) refers to the transfer of the business assets - such as the business equipment, uniforms, leases, contracts, business name, brand names, logos, other intellectual property etc.
An equity transfer (or equity sale) refers to a transfer of the actual legal entity which owns the business assets. For example, if a company called ABC Pty Ltd owns all of the business assets, then an equity transfer would refer to a transfer of the shares in ABC Pty Ltd. ABC Pty Ltd would own all of these assets, both before and after the transfer has taken place. However, the owner(s) of the shares of ABC Pty Ltd would have changed.
In the case of an equity sale (such as the sale of shares in ABC Pty Ltd), the assets and liabilities typically stay with ABC Pty Ltd.
This means, for example, if ABC Pty Ltd owes money for unpaid taxes or employee entitlements, this could become the buyer's problem. If somebody has been injured as a result of ABC Pty Ltd's actions (for example, the sale of a defective product), then that person might bring legal action against ABC Pty Ltd at some point in the future. Again, this could become the buyer's problem.
In the case of an asset sale, liabilities are not usually transferred with the business assets. This means the purchaser might have protection from liability (although each situation is different, so the purchaser should obtain professional advice to make sure).
As a consequence, in the case of an equity sale, the buyer may need to conduct a more thorough process of due diligence, before going ahead with the purchase.
In the case of an equity sale, since a buyer may acquire historic business liabilities (for the reasons described above), it is common for the seller to be required to provide more warranties and indemnities to the buyer than they would in the case of an asset sale.
For example, these warranties and indemnities may make the seller personally liable for any future liabilities, which result from things that happened while the seller owned the business. Sellers may need to consider whether they are willing to provide these warranties and indemnities, which could expose their personal assets.
Buyers may also need to consider whether these warranties and indemnities provide adequate protection. For example, if the seller is asset poor, and does not actually have the capacity to provide compensation if and when such a liability arises, then the buyer may not get the protection they require.
In an asset sale, the parties can choose to only transfer part of the business. For example, the parties might agree that the buyer will take most of the business equipment, as well as the business name and website, but the seller will continue leasing the business premises (but will use it for a new, different type of business), and will keep some other pieces of the business equipment.
With an asset sale, it is easy to split the assets in this manner.
If the business has contracts with third parties, such as a Service Agreement, a Contract for Sale of Goods, a Supply Agreement, a Retail Lease Agreement or a Commercial Lease Agreement (Non-Retail), then an equity sale may make it easier to transfer these contracts.
If the business has secured assets (for example, equipment which has been purchased with money borrowed under a Loan Agreement, and in which the lender has taken a security interest), then an equity sale may also make it easier to transfer these assets.
For example, in the case of an equity sale, where ABC Pty Ltd owns the business, and the purchaser is buying shares in ABC Pty Ltd, all of these contracts and secured assets would be owned by ABC Pty Ltd both before and after the sale.
However, in the case of an asset sale, all of these contracts and secured assets would be transferred from the seller to the buyer. This will require the consent of all relevant third parties and may even require original contracts to be terminated and new contracts to be created. Any secured assets may need to be released from their security interests, before completion of the sale.
It is worth noting that some contracts contain clauses which say that if there is a change in effective ownership of the business (ie if there is a change in ownership of ABC Pty Ltd), then the other party needs to agree to that change in order for the contract to remain effective. Therefore, in some cases, in the event of an equity sale, relevant third parties might still be required to provide consent. However, this is often a more straightforward process than actually transferring all of the contracts to a completely new entity (which occurs in the case of an asset sale).
Asset sales and equity sales have very different consequences for accounting and taxation purposes.
In some cases there may be stamp duty consequences, although the situation varies between the different states and territories of Australia.
There may also be consequences for capital gains tax and for goods and services tax (GST). In some asset sales, the "going concern" GST exemption may be applied.
However, all of these matters can vary from one business sale to the next. Therefore, it is important that parties obtain personalised advice from qualified advisors.
Once the parties have come to an agreement about the terms of the business sale, they may prepare a contract. If and when the contract is signed by the parties, it will be legally binding on them. Therefore, many parties choose to start with a Memorandum of Understanding, which is specifically designed to be non-binding, to outline the basic understanding between them, before they go ahead and spend time and money reviewing the formal contract or preparing for the transfer of the business.
When the parties are ready for a binding contract, for asset sales, the parties may use our Business Sale Agreement.
For equity sales, the parties may need to review the relevant company documentation such as the company Constitution and Shareholders Agreement to consider whether these contain any provisions relating to the sale of shares. The parties may then choose to prepare a Share Sale Agreement.
The parties may agree on a date upon which the transfer will be completed, and will then need to start working towards making it happen. The buyer may conduct due diligence on the business. The seller may start organising for the actual delivery of the relevant assets. In the case of an asset sale, the seller may need to liaise with relevant third parties such as landlords or lenders, to ensure that any relevant contracts, leases, or secured assets, are available for the buyer on the completion date.
If a business name has been registered, and is being transferred as part of the sale, the buyer may need to organise a transfer of business name. If websites or Facebook pages are being transferred, login information may need to be gathered and prepared for handover.
In the case of an equity sale, various other company formalities may also need to be conducted. For example, the seller may need to prepare a share transfer form, have a company meeting and record a resolution to allow the sale of shares and appointment of new directors, complete relevant ASIC forms for changes of shareholders and directors, issue share certificates, and prepare for the outgoing director(s) to resign.
In either case, the exact process to be followed may depend on the nature of the business that is being transferred, and the types of assets which it involves.
Following the sale, the parties may need to account for stamp duty, capital gains tax, or other similar items.
We have outlined two different ways to transfer businesses in Australia. Both options offer some advantages and disadvantages meaning that what works for one business may not work for another. Both options also involve relatively complicated processes.
However, as we have also discussed, there can be significant consequences in terms of ongoing liability, tax, or various other matters. Therefore, it is important that both buyers and sellers carefully consider their own circumstances, and strongly consider seeking professional advice if appropriate.