When you’re considering buying a business, one of the most important decisions you’ll need to make is whether to purchase the shares in the company or its assets. Each option comes with its own implications and complexities, and the right choice will depend on your business goals and the nature of the deal.
Buying the Company Shares: What Does It Mean?
When you buy all the shares in a company, you’re purchasing ownership of the entire entity, including all its assets, liabilities, contracts, and ongoing obligations. Essentially, you step into the shoes of the current owners.
Key Considerations:
- Simplicity: A share purchase can simplify the transfer since you’re buying the entire business as a going concern. There’s generally less need to reassign contracts or transfer assets individually.
- Continuity: The business continues operating without interruption, which can be beneficial when maintaining relationships with clients, suppliers, or employees.
- Liabilities: One major consideration is that you also inherit the company’s liabilities, including any outstanding debts or potential legal claims. This is why thorough due diligence is critical, both by your accountant and lawyer, to identify any hidden risks. Additionally, careful drafting of clauses, particularly indemnities and warranties, is crucial to protect you from unforeseen liabilities and ensure clarity in the transaction
Buying Assets: A More Targeted Approach
When purchasing assets, you are acquiring the business assets, such as goodwill, physical equipment, intellectual property, or customer contracts, rather than acquiring the company itself.
Key Considerations:
- Limited Liability: One of the primary benefits of an asset purchase is that the assets are generally transferred free of liabilities or encumbrances. This means you acquire the assets and the benefit of the business without inheriting the seller’s liabilities. It offers a “clean slate” and reduces the risk of taking on unwanted debts or legal issues from the seller.
- Complexity: An asset purchase often requires the consent of third parties, particularly when key contracts are involved. For example, if a lease, customer or supplier is a key part of the business, the contracting third parties may need to consent to the assignment. This can delay or even prevent the transaction if these parties are unwilling to provide their consent.
- Tax Implications: When considering a business purchase, it’s crucial to understand the tax distinctions between buying shares and assets. In Queensland, a key difference is that transfer duty is payable on asset purchases, but not on share acquisitions. Additionally, the application of GST may vary depending on the transaction type. To fully comprehend your tax obligations and optimize your purchase strategy, it’s essential to consult a tax professional before proceeding with any business transaction.
Which is riskier?
Both options carry risks. When purchasing shares, the primary risk is taking on the company’s liabilities—known and unknown. In contrast, Asset purchases, while potentially limiting inherited liabilities, come with more complex tax considerations and possible difficulties in transferring key contracts.
Regardless of the structure, due diligence is key. In any business acquisition, it’s important to work with experienced legal and accounting professionals. Their experienced advice helps ensure you make an informed decision and understand the full scope of your investment.
Ready to Get Started?
At Ardor Legal, we provide commercial legal advice tailored to your needs, whether you’re purchasing the shares or assets of the business. Our team has extensive experience in business sales and acquisitions, and we’ll guide you through the complexities to help you make the best decision for your future.
Contact us today to schedule a consultation and let us assist you with your next business purchase.
Disclaimer
The information provided in this article is for general informational purposes only and does not constitute legal advice. Reading this article does not create a lawyer-client relationship between Ardor Legal and the reader. The content of this article may not be complete, accurate, or up-to-date, as laws and regulations are subject to change, and the application of law can vary widely based on specific facts and circumstances. Readers should not rely on this article as a substitute for professional legal advice. For legal advice tailored to your situation, please consult with one of our qualified lawyers. Ardor Legal expressly disclaims all liability in respect to actions taken or not taken based on any or all of the contents of this article.
