Shares or assets - comparing the two ways to buy a business - which is right for me?
When you are out searching for a business to purchase, you might have come across two different ways to purchase a business.
Purchasing Business Assets
This is what is commonly known as purchasing a business. If you go with this option, you will be purchasing business assets such as plant & equipment, goodwill, business name, domain etc. Some of the pros and cons of buying a business are:
- You can buy a business under any entity you wish (individual, company or trust) – always seek accountant’s advice in this regard;
- You can select which assets you wish to buy and which ones not to buy;
- You can select which employees you wish to retain and which ones not to retain and re-negotiate employment terms with those you wish to retain (some restrictions may apply);
- You will be buying assets encumbrances free and do not have to worry about the seller’s debts.
- You will need to arrange transfer of any service/supplier contracts, leases, etc if you require them;
- You will need to arrange transfer of business name, domain name and licences (eg. Liquor licence);
- Transfer duty (stamp duty) is payable on the business assets purchase.
- If you are purchasing a business that is not currently trading, it may not be treated as a ‘going concern’ and GST may be payable.
Purchasing Company Shares
Another way of purchasing a business is to purchase shares in the company which operates the business. This means that you will be purchasing the entire company including all assets and even liabilities that it may have. Some of the pros and cons of buying a company are:
- The entity that is running the business does not change so everything is business as usual as far as the operation side is concerned – no transfer of business name, domain name etc;
- More suited if the company has registered various intellectual property rights (eg. registered trademarks) to avoid delays and complication of intellectual property assignment;
- You can capitalise on any good reputation that the company has already established;
- Transfer duty is not payable on company shares (except when land transfer is involved);
- You will take the company’s liabilities as well including tax liabilities and potential law suits against the company – so comprehensive due diligence is required;
- On top of that, it is advisable to seek various warranties from the seller and retention of funds in case of unexpected liabilities;
- For these reasons, the transaction can be more complex and may costs more in legal and accountant’s fees;
- Even though the business entity does not change, changes in directors and shareholders are often treated as an assignment of lease – so a consent from the landlord may be required in the same way as the business purchase.
Either way, you will need good advice from lawyers and accountants. Do not expect that you will be running a new business in a matter of seconds after you sign the contract. Regardless of which options you go with, there will be lots of procedure and paperwork involved before everything is in order for you take over the business. So be patient and listen to the advice from your lawyer and accountant. At the end of the day, they are there to protect your interests!
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