Buying or selling the whole business “Acquisition”.
- Recommend buying the business rather than the shares of a company.
- Buying shares means buying the history and all the contractual obligations, biggest risk is tax liability or customer or employee claims. There may however be tax benefits in buying the shares.
- In either scenario there will be legal contracts involved.
- Ensure all supplier and key customer and lease and licences, trademarks, website, patents, eftpos, phones, vehicles and other important contracts can be assigned to you if buying the business only, or if those contracts require consent if the ownership of the company changes. Make the purchase conditional on consent of the other party agreeing to assign.
- There is no correct method of valuing shares or a business. But once you have agreed on a price it is important to record the method or formula in case the price needs adjusting if facts change.
- Do try and reflect some form of market valuation. If not you could be exposed to IRD interest – gifting or over claimed depreciation etc.
- Consider a staged or conditional payment depending on performance or on a key employee or key customers remaining for a certain period.
- If buying the shares need to ensure its very clear what happens with shareholders accounts – advances, loans, uncalled capital etc. needs to be squared up or reflected in price.
- Also watch for pre-paid memberships, loyalty schemes, accrued holiday pay etc, make sure it is properly accounted for. E.g. gym memberships.
- Don’t sign or go unconditional on the sale and purchase agreement without the legal and accounting input.
- Check PPSA charges against leased or H.P assets of the business – they need to be released or you don’t gain clear ownership. E.g. point of sales systems, whiteware, computer network, photocopier.
- Get vendor to change its name after sale if it has the brand or trading name.
- If selling don’t be too willing to sign up pages of warranties and indemnities. Let purchaser to a good due diligence and check out their concerns properly.
Bringing in a partner or investor or joining forces “Merger”
In practical terms this will always involve either a sale and purchase of a business or of shares. The difference is that the vendor stays on board.
The same issues apply as above with a Sale of business or share agreement being entered, but the key focus has to be on the future with a Shareholders agreement put in place or at least key terms agreed, before you proceed with the merger.
The Shareholders Agreement needs to identify and set out agreements and procedures for:
- obligations
- remuneration
- independent contracts
- shareholder funding
- sale or transfer of shares
- valuation of shares
- deadlock
- disputes
A key issue for negotiation is how much power a minority shareholder will have – anything less than 25% means little influence on major decisions, won’t have any control over directors. This can be varied by agreement, for example by providing that minority shareholders have the right to appoint a director, or that a 100% shareholders vote is required for certain specified major decisions like changing the nature of the business or buying another company. This is important if you are selling the majority of your business and as a result will be a minority shareholder, but do not wish to fully let go of all control.
MacDonald Pilcher Partnership offers franchisor legal services and franchisee legal advice.