I Want to Buy a Business – Do I Buy the Business, or the Company That Owns It?
Deciding whether to buy an established business or buy a company that owns an existing business can be a complex choice to make. In this article, we offer an analysis of the benefits and risks of each option, and a practical guide to help you navigate this important decision with clarity.
Different business structures
In Australia, different types of legal entities can own and operate businesses. These include:
● sole traders,
● partnerships,
● companies,
● and trusts.
Each legal entity has unique implications for the business owner(s) in regard to liability, taxation, and management structure.
Business vs company: What is the difference?
A business is an organisation that carries out activities to make a profit, and a company is a legal entity that can own and run a business.
When you buy an Australian business, you only purchase the assets, liabilities, and responsibilities directly related to that business. On the other hand, when you buy a company, you're buying the entire legal entity, which includes a broader range of assets, liabilities, and responsibilities that may go beyond just the business itself.
Key takeaway: The main difference between a business vs company is their legal setup, with a company having more legal responsibilities than a business.
Buying a business or company: Asset sale vs share sale
If you want to buy a business owned by a company, there are two paths you can take: asset sale or share sale.
Option 1: Buying a business (asset sale)
An asset sale means you purchase the assets of a business, such as equipment, inventory, and customer lists. This option is generally the most common way to buy a business, especially small to medium-sized businesses.
Asset Purchase Agreement
In an asset sale, the asset purchase agreement outlines the terms and conditions for selling and transferring the business assets from the seller to the buyer.
An Asset Purchase Agreement, also known as a Business Purchase Agreement, typically includes:
● Parties involved: Details of the buyer and seller.
● Purchase price: Total price for the assets, adjustments, and payment terms.
● List of assets: Specific assets being transferred, such as equipment, inventory, and intellectual property.
● Representations and warranties: Statements confirming various aspects of the business and its operations.
● Conditions precedent: Conditions to be met before the transaction proceeds, such as approvals or due diligence.
● Indemnities: Provisions outlining liability and responsibility for breaches, misrepresentations, or undisclosed liabilities.
● Closing arrangements: Details about transaction completion, asset transfer, and payment.
● Confidentiality and non-compete clauses: Provisions to protect sensitive information and prevent competition from the seller post-sale.
Option 2: Buying a company (share sale)
A share sale involves purchasing the shares of a company, which means acquiring the legal entity that owns the business(es).
Share Sale Agreement
Also known as a Stock Purchase Agreement or Share Purchase Agreement, a Share Sale Agreement is a legal document that outlines the terms and conditions for the sale and purchase of shares in a company.
A Share Sale Agreement typically includes:
● Parties involved: Details of the buyer, seller, and company whose shares are being sold.
● Purchase price: Total share price, adjustments, and payment terms.
● Number of shares: Specific number of shares being transferred.
● Representations and warranties: Statements confirming various aspects of the company and its business.
● Conditions precedent: Conditions to be met before the transaction proceeds, such as approvals or due diligence.
● Indemnities: Provisions outlining liability and responsibility for breaches, misrepresentations, or undisclosed liabilities.
● Closing arrangements: Details about transaction completion, share transfer, and payment.
● Confidentiality and non-compete clauses: Provisions to protect sensitive information and prevent competition from the seller post-sale.
Case study: Alex buys a fitness centre
Let's look at Alex, who is considering purchasing a fitness centre, as an example of the two options. They can buy the fitness centre as a business or the company that owns the fitness centre.
Option A: Buying the fitness centre business
Suppose Alex chooses to buy the gym as a business. In this scenario, he will acquire the assets and liabilities directly related to the gym's operations. This will include equipment, inventory, customer lists, and contracts with suppliers or employees.
This option is generally more straightforward and focuses on transferring the assets needed to run the gym. Alex will have more control over which assets they want to acquire and will avoid taking on any broader legal or financial obligations that might exist at the company level. However, they may still need to address any outstanding debts or legal obligations associated directly with the gym's operations.
Option B: Buying the company that owns the fitness centre business
In this instance, Alex will purchase the legal entity (the company) that owns the gym. This means they will be taking on the entire set of assets, liabilities, and obligations of the company, extending beyond the specific operations of the gym.
Choosing to buy a company can be a more complex process, as it involves addressing company-level concerns such as shareholder agreements, company history, and broader financial obligations. However, this option may offer advantages such as business continuity, potential tax benefits, and more financing options, as Alex would be acquiring an established legal entity with a proven track record.
Of course, not every business is owned by a company; many businesses are owned by other legal entities such as sole traders, partnerships, or trusts, each with its unique characteristics and implications for the business owner.
Benefits of buying a business
Less complexity: When you buy a business, the process is usually more straightforward. You only need to deal with transferring assets and handling necessary contracts rather than dealing with the complex issues of buying a whole company.
Choose your assets: You have more control over which assets you want to keep, such as equipment and inventory, leaving out what you don't need.
Less liability: By purchasing a business, you can avoid taking on responsibility for the seller's unrelated debts and obligations. You only take on the liabilities directly tied to the business.
Risks of buying a business
Missing assets: You might not get all the essential assets to run it successfully, like important equipment or supplier contracts.
Ownership of Assets: You’ll need to undertake thorough investigations to ensure that all of the assets you are acquiring are owned by the Seller, and not leased or rented. If they are, you will need to assign those agreements by Completion.
Business disruption: As you take over a business, you might face difficulties with existing customers or key employees, who may not transition smoothly under new ownership.
Benefits of buying a company
Smooth transition: When you buy a company, it can help preserve existing relationships with customers, suppliers, and employees, leading to a seamless changeover and continuous operations.
Tax advantages: Purchasing a company could allow you to use the company's tax losses (if any) to offset future profits, potentially resulting in tax savings.
Increased financing opportunities: By acquiring a well-established company, banks and lenders may be more inclined to offer financing because of the company's proven success and financial stability.
Risks of buying a company
Undisclosed liabilities: As a buyer, you must be mindful of any hidden debts and legal obligations beyond specific business operations.
Greater complexity: Acquiring a company can be more complex and time-consuming than buying an individual business, as it involves addressing company-level concerns like shareholder agreements and legal entity history.
Ownership limitations: If the target company has multiple shareholders, full control over decision-making may not be possible, which could impact the future direction of the business.
By understanding the differences between buying a business and buying a company and considering the implications of asset sales and share sales, you can make a more informed decision that best suits your goals and requirements as a business owner.
Consult a business lawyer
When buying or selling businesses or companies, it's crucial to seek advice from a business lawyer who can help you understand the legal aspects and protect your interests through the selling or buying process.
At Bradley & Bray, our experienced lawyers specialise in business law, guiding you through the complexities of the process. Contact us today to get started.
This article is general in nature and does not constitute legal advice. If you require legal advice in relation to your personal circumstances, you must formally engage our firm, or another firm to provide legal advice in relation to your matter. Bradley & Bray lawyers takes no responsibility for any use of the information provided in this article.
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