In our last newsletter, with food businesses being the flavour of the month/year from a transaction perspective especially with Private Equity we focused on the issues associated with an asset sale. In this article, we will concentrate on the main issues involved with share sales of food businesses.
What is a share sale?
A share sale is slightly more complex commercially because with the shares comes a range of potential liabilities (for the purchaser), many of which may not be identified on the balance sheet of the entity. In some instances the share value may be determined on the basis of the expected future earnings of the business and may not take into account the underlying market value of the assets or liabilities being acquired. Where a purchaser acquires 100% of the shares in an entity, the purchaser takes control of the entity and all of the assets and liabilities.
6 Key items to consider with a share sale
Continuity of business name: the business is carried on by the same entity with the purchaser stepping into the shoes of the seller thereby reducing the need for costly and time consuming administration matters. In some instances, customers may not even realise there has been a change of ownership.
Employees: usually remain with the entity and purchaser. Apart from possible provisions in the sale and purchase agreement that may provide for redundancy of specific staff or specific benefits to be paid upon change of control of the business, the legal identity of the employer remains the same.
Assignment: prohibitions against assignment may not arise as the contracting party remains the same. This means that it may be easier to sell the shares than re-assign or novate a large numbers of contracts or licences. It is still important to review the terms of these agreements as often they have ‘Change of Control’ clauses which may have implications for the new purchaser.
Tax consequences: there may be franking credits, tax losses or undisclosed tax liabilities. Potential tax benefits may arise for the seller including small business tax concessions. There may be more flexibility to structure the transaction to optimise the after-tax outcome for the seller. Remember that the purchaser of shares inherits all the “skeletons in the cupboard” of the entity acquired and warranties in the agreement may be of little future value if the seller has dissipated the funds received.
Unrecorded liabilities: including tax liabilities or warranties the purchaser may not know of. It is important to ensure tax, legal and accounting due diligence is undertaken in an effort to identify these liabilities.
Warranties: the vendor will need to ensure they obtain relevant warranties from the purchaser to ensure they are not left with unresolved liabilities such as unpaid fringe benefit tax or payroll tax.
Finally, as with and asset sale 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 transactional support for food businesses please contact Colin Samuel or your ESV engagement partner on 02 9283 1666.