The difference between buying a business and buying the shares of a business

If you’re considering buying a business, you might wonder what’s the best approach. Should you simply take over all the shares in the company? Or should you buy the business assets and transfer them into your own business entity? And what are the risks and advantages of both?

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The difference between buying a business and buying the shares of a business

From a high-level perspective, there are fundamental differences between a ‘business’ sale – or what we’d call an ‘asset sale – where you’re buying the assets of a business, and a ‘share sale’, where you’re buying all the shares of a business. In both cases you’re taking ownership of a business, but through different mechanisms.

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What is a business sale or asset sale?

When you enter into a business sale or asset sale you are typically buying all or some of the assets of that business. This could include stock and equipment, as well as the business name, intellectual property, client lists and even goodwill. 

Along with the assets, you’ll also be taking over the day-to-day operations and actual running of the business (or that portion of the business) under your own business entity. (In Australia there are several different legal entities that may own and operate a business.) The company itself, remains a separate entity that doesn’t transfer to you with the sale of the business.

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Advantages of a business sale or asset sale

As a buyer, there are advantages to purchasing a business through an asset sale.

• Liabilities do not transfer with the assets (though as the buyer you may agree to take on certain liabilities, for example, bank debts or employee entitlements).
• You can structure the purchase in a way that suits you, buying only those assets that you want and need. 
• Your asset sale may be classified as a ’going concern’, which means you will not be required to pay GST.

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Disadvantages of a business sale or asset sale

• You may be required to pay stamp (or transfer) duty.
• Third-party suppliers or contractors may be unwilling to assign their contracts to you as the purchaser. 
• Some assets may not be assignable, which could leave your operations at risk. 
• You may have to accept liability for previous employee entitlements.

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What is a share sale?

On the other hand, when you enter into a share sale,  rather than separately buying the assets from that company, you’re buying all the shares of the existing company in order to take over ownership of both the company and the business(es) it runs. 

The company as structured continues to exist, and only your ownership and shareholding of it changes. Importantly, that also means you acquire all of the assets and liabilities that the company currently has. 

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Advantages of a share sale

• It may be easier to pass along brand recognition and reputation with no company changes.
• There’s no need to reassign any contracts or agreements. 

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Disadvantages of a share sale

• You will become a shareholder in the company.
• You will take on all the past, current and future liabilities of the company.
• There’s a huge amount of business due diligence that needs to be completed in order to find out the potential liabilities and risks in the company. ‍

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‍Why we generally recommend an asset sale

In general, we believe that asset sales represent less of a risk to buyers than a share sale. When you purchase business assets as opposed to shares in the entity that owns the business, then from the date of settlement, you are able to continue to operate the business as its new owner, with known assets, free of any ongoing disputes or obligations of the previous business owner.

And because you’re only buying the assets you need in order to operate your business, you’re only paying for those elements of the business.

There are also additional risks associated with a share sale.

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Risks of a share sale

• You inherit the liabilities of the company – not just of the business that you want to acquire. This could include tax and operational liabilities, litigation and compensation claims and worker’s compensation claims.
• You inherit any security interests and encumbrances.
• You will inherit current employees as well as the requirement to honour each employee’s accrued entitlements.
• Key contracts may have a ‘change of control’ provision which you will have to comply with in order to maintain those contracts. 

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Structuring your contract

Whether you’re entering into an asset sale or a share sale, it’s vital you have a well-drafted contract that lays out the terms accurately. 

If you’re entering into an asset sale, your contract must specify the legal owner of the business and the legal entity that is purchasing the business. 

It’s also important that you purchase the assets that make up the business so that it can continue to operate under your ownership. All of these business assets must be specifically detailed in the contract of sale so that transfer of ownership can occur.

If there are contractual relationships essential to the ongoing operation of the business, these may need to be separately negotiated. These may include:

• Terms of a lease agreement with the owner of the property on which the business is located.
• Contracts of employment with employees.
• Contracts with suppliers, for example, newspapers, magazines and stationery items for a newsagency. 

If you’re entering into a share sale, you’ll need a thorough share sale agreement that can help you minimise your potential risks. It should include the necessary representations and warranties from the seller, accurately describe the business being carried on by the company and provide any indemnities require. 

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Getting expert advice

With any business sale, there are other considerations. There could be duties required. Your solicitor can advise you on associated duties to be paid on the purchase of a business. In NSW this can include transfer duty, which is payable three months after you sign the sale of business agreement. 

There could also be tax risks and obligations. You should speak with your accountant to get advice on these before buying any business or shares in a business.

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Considering buying a business? We can help.

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