Buying a business

Asset sale or share sale, and why it matters to you

Every business purchase is structured one of two ways, and the choice moves risk between buyer and seller more than any other decision in the deal.

Asset sale

You buy the things: plant and equipment, stock, goodwill, business name, customer lists, intellectual property, and the benefit of contracts that can be assigned. You do not buy the company, so you do not inherit its history. Its tax debts, its old customer claims and its unpaid superannuation stay with the seller. Most small business purchases are asset sales for exactly this reason.

Share sale

You buy the company itself. Everything comes with it: the contracts, the licences, the leases, and also the liabilities you have not found. Share sales are used where the value sits in something that cannot be transferred, such as a licence, an accreditation or a long lease with no assignment right. They demand much deeper due diligence and much stronger warranties and indemnities.

If you are buying shares in a company you will now co-own with someone else, you also need a shareholders agreement signed at completion, not promised afterwards.

Due diligence: what to actually look at

Due diligence is not a document review. It is a list of questions you have to answer before your finance and due diligence conditions expire.

• The numbers. Three years of financials and tax returns, plus BAS lodgements, reconciled against the bank statements. Your accountant does this part. Ask specifically what the owner pays themselves and what a replacement would cost.
• The lease. How long is left, is there an option, is the rent at market, does the landlord have to consent to assignment, and is there a make good obligation at the end. A three year business on a nine month lease is a very different asset.
• The staff. Who is employed, on what instrument, with what accrued leave, and are any of them the actual reason customers come back. Contractors who look like employees are a liability you inherit in a share sale.
• The customers. Concentration is the risk. If one customer is 40 per cent of revenue, you are buying that customer relationship, and you should ask whether it survives the seller leaving.
• The contracts. Supplier terms, franchise or distribution agreements, equipment finance, software licences. Look for change of control and assignment clauses.
• The assets. A PPSR search against the seller and the equipment will show you what is financed or subject to retention of title. Buying encumbered plant is a genuinely common error.
• The compliance position. Licences, permits, food safety, QBCC, liquor, and whether they transfer or have to be reapplied for.

Anything you find that you cannot fix becomes either a price reduction, a special condition, a warranty, a retention held at settlement, or a reason to walk away.

Queensland transfer duty on a business purchase

Transfer duty is assessed by the Queensland Revenue Office and is usually payable by the buyer. Business assets that can attract duty include goodwill, statutory business licences, business names, rights under a franchise arrangement, supply rights, intellectual property, business debts where the debtor is in Queensland, and personal property located in Queensland such as plant and trading stock.

There is a narrow exception. An agreement solely for the transfer of a debt, a supply right, intellectual property or personal property of a business, with nothing else included, may not be dutiable. In practice goodwill is what pulls a transaction into duty, and QRO takes the view that goodwill can exist even where the contract does not mention it.

This is why the apportionment of the purchase price across the assets is not a formality. It affects duty for you and capital gains tax for the seller, and the two of you have opposite interests. Agree it in the contract, and get your accountant to sign off on it before you do.

The conditions that should be in your contract

1. Subject to finance, with a real date and a right to terminate if approval on satisfactory terms is not obtained.
2. Subject to due diligence to your satisfaction, which is a genuinely useful clause if it is drafted in your favour rather than as a reasonableness test.
3. Subject to assignment of the lease and to the landlord releasing the seller and accepting you, on terms you have seen.
4. Subject to transfer of licences and permits where the business cannot legally trade without them.
5. A restraint of trade on the seller, drafted as cascading periods and areas so a court can read down the widest limb without striking out the whole clause.
6. A training and handover period with an actual number of hours in it.
7. A stocktake at settlement and an adjustment mechanism for stock, rent, rates and prepayments.
8. Warranties from the seller about the accuracy of the financials, ownership of the assets, absence of undisclosed liabilities and compliance with the law, with a retention or a holdback if the risk warrants it.

If you are buying a franchised business, the Franchising Code adds another layer on top of all of this, including a disclosure document and cooling off rights. Start with buying your first franchise.