Asset or Share Acquisition?
Posted 23 Dec 16 by Andrew Jones
When purchasing a business there are two main alternatives for the structure of the acquisition:
Acquire a 100% or controlling interest in the shares of the company that owns the business; or
Acquire from the vendor the assets required to carry on the business.
The assets of a business may include tangible assets and intangible assets. Tangible assets may include:
2. Plant and equipment; or
Intangible assets may include:
- Customer lists;
- Intellectual property (patents, designs, trademarks, formulas); and
For the acquisition of a business it is important that all of the assets required to operate the business are identified during the due diligence process and specified in the acquisition agreement.
The acquisition of a business is generally considered to be a lower risk structure for the acquirer as the purchaser is not responsible for any liabilities of the company. The trade-off for this is the added complexity of assigning the key legal agreements and rights required to operate the business.
The key considerations for each form of acquisition are discussed below.
Selective asset acquisition
An asset acquisition gives the purchaser the opportunity to determine which assets they wish to acquire. This removes the need to divest any surplus assets that would otherwise have been acquired as part of a share purchase, leaving the vendor to deal with these assets.
All contracts required for the conduct of the business will need to be assigned by the Vendor to the Purchaser. This will usually require the consent of the counterparty to each contract.
Change of ownership clauses in key commercial contracts should be reviewed as part of the legal due diligence exercise. Such clauses usually apply in major supplier and customer contracts, property leases, equipment finance and other debt arrangements.
Care should be taken as suppliers and customers may use this as an opportunity to renegotiate the terms of the contract or terminate the contract.
The Purchaser should consider the need to discuss the proposed acquisition with key suppliers or customers at an appropriate time prior to completion of the acquisition.
The Purchaser should confirm which employees it wishes to retain with the business and make offers of employment to these employees.
The Purchaser will assume the accrued annual leave and long service leave entitlements for these employees. This should be factored into the purchase price. The Vendor will be responsible for any redundancies.
Any employee benefit plans such as pension schemes or defined benefits superannuation plans will need to be acquired or assumed by the Purchaser.
Tax treatment of assets acquired
The cost base of the assets acquired for CGT purposes will be the market value at the time of purchase.
Where assets are acquired as part of a “going concern” there will not likely be any GST payable with respect to the purchase. If the sale is not of a “going concern” GST will be payable.
Stamp duty and land tax will likely be payable on the acquisition of real property, depending on the state in which the property is located. Stamp duty on assets is usually much higher than on shares.
Allocation of purchase price
The purchase price must be allocated between the assets for tax and accounting purposes. The Vendor will often want to allocate the purchase price based on their book value the purchase benefits from a higher value being attributed to assets that are depreciable for tax purposes.
The key consideration for the acquisition of the shares of the entity that owns the business is that the Purchaser becomes responsible for all the liabilities and other obligations of the entity. This includes all liabilities incurred prior to the date of acquisition.
This requires a careful review for unrecorded liabilities during the due diligence process. This should include taxes such as income tax, GST, payroll tax, FB, unremitted superannuation contributions and employees PAYG payments as well as amounts due to supplier and other trade creditors.
It is critical that a thorough due diligence process is conducted to identify and understand the nature and extent of risks, liabilities and obligations that the Purchaser is assuming.
Although risks may be mitigated to some extent by warranties and indemnities provided by the Vendor there is a risk that the vendor may dispute any claims under the share sale agreement or may lack the financial capacity to meet warranty or indemnity claims
Continuity of business
There is no need to change the name of the business. In some cases customers may be unaware of the change in ownership.
As the contracting party for the business’ legal agreements will not change there will not necessarily be a requirement to assign or novate all legal contracts. Nevertheless, change of control provisions may be triggered in some contracts depending on the terms of each contract.
As there is no change in the legal identity of the employer there is typically no impact on employment arrangements.
The Purchaser may seek a reduction in the purchase price (for a debt free / cash free acquisition) for long service leave provisions and unfunded pension deficits. There is often debate over the treatment of annual leave. Certainly at a minimum excess balances should be treated as debt.
Stamp duty may be payable on the acquisition of shares depending on the state in which the company is incorporated. Stamp duty may also be payable where the acquisition is the acquisition of a land rich asset.
The acquirer may be able to utilise any carried forward tax losses of the business, however, this is subject to satisfaction of the same business test, which can be difficult to satisfy even if there is only a minor change in the nature of the business acquired.
The cost base of assets is reset by the Purchaser at the time of acquisition. An independent valuation is often sought to determine the value of identifiable intangible assets such as intellectual property and customer lists.