Sometimes when a business owned by a company is being sold, for various reasons, the parties decide to do this by way of the buyer purchasing the seller’s shares in the company that owns the business. This is rather than the buyer purchasing the actual business from the seller company. This is documented in a share sale agreement.
There are pros and cons for both parties in a share sale. This includes:
Pros –
- In some circumstances no transfer duty is payable on a share transfer
- There can be tax savings for a seller in selling the shares, rather than the business itself
- There is no need to change bank account details of the business
- The sale will not trigger any changes to the business that require the customers of the business to do anything
Cons –
- A company is considered a legal person. Despite this, a change in directors/shareholders may trigger the seller still having to obtain consent of some third parties before the sale can occur. This may include a landlord, customers with service contracts and suppliers with trade accounts.
- The buyer will retain the history of the company. They inherit the company ‘warts and all’ and ‘with all skeletons in the cupboard’. Due diligence is crucial for a buyer.
- Extensive warranties may need to be provided by a seller and so the sale may not be ‘as clean’ after settlement for a seller, compared to a business sale.
- The parties need to take into consideration issues to determine the sale price, including cash at bank, outstanding taxation liabilities, debtors, creditors, employee entitlements, dividends and company loans between the company and sellers. Your accountant will need to be substantially involved in this process.
- The sellers will need to try to be released from any personal guarantees but sometimes the third party will not agree to release a seller.
The terms of the share sale agreement are essential. Parker Law QLD have the appropriate knowledge and experience to assist you and at a fair price.
