Structuring the sale or purchase of a business is critical, as it impacts financial outcomes, tax implications, and the allocation of risk between buyer and seller. This article examines key considerations when structuring a business acquisition or disposal, focusing on the choice between an asset or share sale, purchase price structuring, and adjustment mechanisms.

Asset vs. Share Sale

Asset Sale

In an asset sale, the buyer acquires specific assets of the target company rather than its shares. This structure can offer several advantages, including:

• Selective Acquisition – The buyer can exclude unwanted assets and liabilities, acquiring only those essential or valuable to the business, such as intellectual property, equipment, real property, key employees, and material business contracts.
• Tax Benefits – Buyers may benefit from tax incentives, such as depreciation on acquired assets, while sellers may qualify for small business capital gains (CGT) tax concessions or a CGT discount. The sale may be exempt from GST if the business is sold as a ‘going concern.’

However, asset sales also present challenges:

• Complexity and Cost – Each asset must be transferred individually, leading to increased administrative burden and legal expenses.
• Transferability Issues – Some assets, such as government licenses, may not be transferrable, requiring the buyer to obtain new approvals, creating uncertainty, risk, cost and potential delays.
• Secured Assets – Assets subject to finance may require the seller to discharge existing security interests before completion.
• Third-Party Consents – Material contracts (e.g., leases, supplier agreements, and customer contracts) may require third-party consent, which could impact the viability of the deal or the purchase price if consent cannot be obtained.

Share Sale

In a share sale, the buyer acquires shares in the target company, assuming control of both its assets and liabilities. The company remains the legal owner of its assets, but ownership of the entity itself changes hands.

Advantages of a share sale include:

• Simplicity – No need for individual asset transfers; the company’s ownership simply changes.
• Continuity – Key contracts, licenses, and business relationships remain in place, avoiding renegotiations or third-party approvals. However, certain contracts and licences may still require consent on a ‘change of control’ arising from a share sale.
• Tax Benefits – Sellers may qualify for CGT concessions, and buyers typically do not pay GST on the acquisition of shares.

However, a key disadvantage is that the buyer inherits the target company’s liabilities, including potential litigation, debts, and tax obligations. To mitigate these risks, sale agreements typically include:

• Warranties and Indemnities – legal protections ensuring the seller remains liable for undisclosed liabilities.
• Apportionment of Liabilities – A mechanism distinguishing pre-completion liabilities (which are generally the seller’s responsibility) from post-completion liabilities (which generally land with the buyer).

Purchase Price Structuring

Determining how the purchase price is structured is fundamental in any business acquisition. Aside from valuing the assets or shares being purchased, key considerations may also include:

Deposits

A deposit (typically 10% of the purchase price) may be required to secure the buyer’s commitment and protect the seller if the deal falls through due to the buyer’s default.

Deposits are usually held in a interest-bearing escrow account, with refunds permissible if the seller fails to meet obligations or due diligence reveals material concerns.

Deferred Consideration

Rather than paying the full amount upfront, buyers may negotiate deferred payments to:

• Preserve cash flow – reducing their immediate financial burden.
• Incentivise smooth transition – ensuring the seller cooperates with the buyer by assisting with the post-completion transition.
• Mitigate buyer risk – allowing set-off rights for adjudicated warranty breaches, alleviating the need for the buyer to seek direct reimbursement from the seller for proven claims.

Sellers accepting deferred consideration should weigh the risk of non-payment and consider protective measures, such as guarantees or retention amounts. In certain cases, deferred consideration may enable the seller to negotiate a higher purchase price as it isn’t receiving the full benefit of the sale proceeds upfront.

Earnouts

An earnout structure links part of the purchase price to the future performance of the target business or other KPIs, typically based on revenue or profit milestones over a set period.

• Buyer Benefits – Reduces upfront payment risk and incentives the seller to invest in the future performance and success of the business.
• Seller Considerations – Potential for additional payouts correlating to hard-work and commitment.
• Contractual Protections – Sellers can mitigate risks by negotiating protections against wrongful dismissal, earnout manipulation, or adverse operational changes. Keep in mind, the seller will not manage the business following completion, at least not exclusively, and therefore risk exists if the buyer mismanages the business or influences performance metrics to avoid paying the earnout.
• Sliding Scale Mechanisms – For seller’s, a ‘sliding-scale’ earnout mechanism is prudent. This means that instead of an all-or-nothing payout, a tiered earnout structure is used to allow for partial payments based on varying levels of performance.
• Caps and Collars – caps and collars refer to negotiated minimum and maximum payout limits in connection with an earnout. These tools are commonly used to set reasonable boundaries on potential payouts tied to the future performance of the business. By establishing these minimum and maximum amounts, both the buyer and the seller can better manage risk, ensuring that neither party faces extreme outcomes based on a spike or downturn in performance.

Purchase Price Adjustments

To ensure fair pricing in a business sale, agreements often include purchase price adjustment mechanisms based on the company’s financial position as at a particular point in time. These adjustments, among other things, help ensure that the business is transferred with a normalised level of working capital and net debt, preventing unexpected value shifts between the buyer and seller. Two widely used purchase price adjustment methods are the ‘Locked-Box’ method and the ‘Completion Accounts’ method, each with distinct implications for buyers and sellers.

Locked-Box Method

This approach is based on a fixed-price model, where the purchase price is determined using the company’s financials as at a specific, historical ‘locked-box date’, with no post-completion adjustments for the company’s actual financial position at completion.

• Economic Risk: The seller benefits from the performance of the business up to the locked-box date. However, any value extracted after the locked-box date (except for negotiated permitted) is considered ‘leakage’ and is usually repaid to the buyer.
• Pros: Provides certainty, reduces cost and the risk of post-completion disputes.
• Cons: The buyer assumes financial risk between the locked-box date and completion, making thorough financial due diligence essential to avoid overpayment. This method generally produces less accurate results and the Completion Accounts Method.

This method may be suitable for stable businesses with predictable cash flows.

Completion Accounts Method

Unlike the locked-box pricing methodology, this pricing alternative is based on the actual financial position of the business at the time of completion.

Under the sale agreement, the parties usually agree on good faith estimations of normalised working capital and net debt of the target business. Once the sale completes, the buyer prepares the ‘completion accounts’ in accordance with agreed accounting principles and policies, also set out in the sale agreement. The seller reviews these accounts, and any disputes are resolved through negotiations or by an independent accountant. The final price purchase is then adjusted accordingly, with the buyer paying or receiving the difference between the estimated and actual financials.

• Pros: Generally, more accurate and fairer in comparison to the locked-box pricing method, as the purchase price is adjusted to reflect the actual financial position of the business at completion, preventing the buyer from over or underpaying.

• Cons: More complex, costly and time consuming than the locked-box pricing method and may lead to disputes following completion. Deep accounting, financial and tax expertise is recommended.

This method is preferred in major acquisitions and disposals, particularly where the financial position of the business may fluctuate rapidly, and the working capital requirements are volatile.

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The structuring of a business sale or purchase significantly impacts financial, legal, and tax outcomes. The decision to pursue an asset or share sale, as well as how the purchase price is structured, requires careful planning and negotiation. By addressing these considerations early and engaging expert legal and financial advisors, parties can navigate complexities and achieve commercially favourable outcomes.

For legal assistance with your business purchase or disposal, contact our experienced corporate transactional lawyers at 03 9481 2000 or info@tauruslawyers.com.au.