What to Consider in an Asset Sale
When selling the assets, the employment relationship cannot be ‘transferred’ from the vendor to the purchaser as employment contracts are personal in nature. It will therefore be necessary for the vendor to terminate the employment contract with the employee, and for the purchaser to decide if they wish to enter into a new employment contract with each individual employee. The vendor must ensure that employees receive the benefit of any accrued entitlements.
Any third party contracts may require third party consent to be assigned, or may not be assignable at all, thereby reducing the value of the business to the purchaser. For example, the consent of landlords or finance companies may be required for transfer of any property or plant & equipment leases. Apportionment: The purchase price must be apportioned between various classes of assets, including plant and equipment, land and buildings, stock, and goodwill if applicable. 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.
Goods and Services Tax (GST):
Depending upon the details and nature of the transaction, the sale may be deemed as the sale of a ‘going concern’ – or not. This will result in no GST being payable on the transaction. Alternatively, where the asset sale cannot be categorised as a going concern, a GST liability may arise.
Stamp duty or land tax may be payable on the transfer of land and other real property, depending upon the state in which the assets are located. Stamp duty is generally higher on transfer of assets than shares.
A share sale because with the shares comes a range of potential liabilities, many of which will vary in value from day to day, and which may not be identified on the balance sheet of the entity. Share sales involve the sale of the shares in a trading entity, related entities and occasionally units of a unit trust. 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 and past history of that company. Generally this is done with the Sellers guarantees and warranties, which may include some security from the Seller. When conducting a Share Sale the sale agreement must be produced by an experienced legal team, and these documents can be complicated. Share sale agreements must contemplate many variables including adjustment at settlement for profit, liabilities, and asset changes.
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Read the previous blog on What An Asset Sale Involves by clicking here