To sell or what to sell? – That is the question
With the food business continuing to grow and high multiples being paid, especially by private equity, it is vital that these sale transactions are structured properly and project managed correctly by advisors from the start . A failure to do so can lead to major issues from both a value as well as general deal perspective. When selling a business, there are generally two methods available, an asset sale or a share sale. In this article, we will focus on asset sales and some of the key things you should keep in mind.
So, what is an asset sale?
An asset sale involves the sale of some or all of the assets owned by an entity and used in carrying on the business of that entity. Usually, these assets are specifically identified in the sale and purchase agreement. Sometimes employee liabilities such as accrued annual and long service leave are deducted from the asset price or paid out for tax reasons.
6 Key items to consider with an asset sale
An employee's current employment contract will usually be with the seller or entities controlled by the seller. When selling the assets, in this instance, the employment relationship may not be 'transferred' from the seller to the purchaser as employment contracts are personal in nature. Instead it may be necessary for the seller to terminate the employment contract with the employee and for the purchaser to enter into a new employment contract with each employee. The seller will need to consider the treatment of the accrued entitlements, which can vary depending on the terms and conditions of employment of each employee. Similarly, any employee benefit plans may also have to be acquired or assumed and that can be particularly costly in some situations.
2. No Assignment
Key contracts may need third party consent to be assigned, or may not be assignable at all, thereby reducing the value of the business to the purchaser. Specific arrangements may be required to vest title in the purchaser. For example, the consent of landlords or finance companies may be required for transfer of any property or plant & equipment leases where these are subject to mortgages or live purchase agreements.
3. Ability to cherry pick
Asset sales provide the purchaser with the ability to choose which assets to acquire and to leave any unwanted assets with the seller, such as the vendors motor vehicle or other non core business assets that may be on the balance sheet but may not be needed to operate the business going forward.
Under the accounting standards the purchase price must be apportioned between various classes of assets, including plant and equipment, land and buildings, stock, identifiable intangibles (such as brand names, customer lists ) and finally goodwill. This can cause a conflict between a seller's preference to adopt their book value and a purchaser's preference to adopt a higher value to maximise tax benefits. The purchase price can, within relevant parameters, be apportioned between assets sold which may result in tax advantages for the seller.
5. Tax consequences
For a purchaser, the cost of assets can be reset to their market value at the time of purchase which in most instances will reduce the capital gains tax that might otherwise arise at a future date and result in a benefit to the purchaser. A seller might gain a benefit by utilising tax losses to offset other tax liabilities arising from the sale.
6. Goods and Services Tax (GST)
Where all of the assets of a business are transferred the sale may be classified as the sale of a 'going concern'. This may result in no GST being payable on the transaction. Alternatively, where the sale cannot be categorised as a going concern, a GST liability may arise.
Finally, it is essential to ensure that sufficient due diligence has taken place to ensure there are no unpleasant surprises following your sale. Should you have any questions or require more information about asset sales please contact your ESV engagement partner on 02 9283 1666.