Selling a business is not just about price. How the sale is structured — as an asset sale or a share sale — affects tax, risk and how much administrative work each side must do.

An asset sale is often preferred by buyers, but it can be far more cumbersome for the seller. A share sale can be simpler to implement but usually requires deeper due diligence. Tax consequences frequently determine which structure is chosen. The right answer depends on the specific business, not a general rule.

The two structures, in short

In an asset sale, the buyer purchases the individual assets of the business — plant, stock, intellectual property, goodwill and the benefit of contracts. Each contract must be assigned or novated, and assets such as vehicles must be individually transferred.

In a share sale, the buyer acquires the company itself. Contracts, licences and employees generally remain in place because the legal entity does not change. That convenience comes at the price of inheriting the company’s history — hence more searching due diligence.

How the issue arose in a business we acted on

A few years ago, we acted for the vendor in the sale of an established pest control business to an international acquirer. The initial plan was an asset sale.

We identified real practical burdens with that structure. Thousands of individual customer contracts would need to be assigned. Approximately 85 motor vehicles required transfer, including roadworthy certificates, re-registration and stamp duty. There was also the question of transferring staff.

We then raised a tax concern that mattered more than the paperwork. There was a possibility the Australian Taxation Office might treat an earlier event as a capital gains tax event affecting the vendor. That risk did not affect the buyer, but it could significantly affect our client. On that basis, all parties agreed it was prudent to seek a private tax ruling before locking in the structure, and to place the question of structure on hold until the ruling issued.

To keep the deal moving while that was resolved, we suggested the buyer provide a letter of intent that expressly left open whether the sale would proceed as an asset or share sale, preserve exclusivity, and pay a fully refundable deposit held in escrow.

Managing risk when an asset sale proceeds

The transaction ultimately completed by asset sale. Two features of the structure did the heavy lifting on risk.

First, instead of a warranty and indemnity insurance policy, the parties used a holdback: assets exceeding a set value were left in, together with a contingency payment, to stand as security against contingent tax, regulatory or employment liabilities for a period after completion.

Second, because the vendor company was to be deregistered, we prepared a deed of assignment so the vendor’s right to receive the withholding amount could be assigned to an individual already party to the agreement. We flagged an important limit: an assignment can transfer the benefit of a contract, but it cannot shift the vendor’s obligations — the company remained responsible for performing them.

Where obligations needed to move, we used a deed of novation with the incoming party assuming liabilities and indemnifying the outgoing party, and a release negotiated so the company could ultimately be deregistered. Because the agreement did not permit assignment before completion without consent, we built the purchaser’s consent into the deed itself.

What sellers and buyers should consider

  • Decide structure early, but keep it open if tax is uncertain. A private ruling can be worth waiting for.
  • Count the moving parts. Thousands of contracts and dozens of vehicles turn an asset sale into a logistical project.
  • Assignment is not novation. Assignment moves benefits; novation is needed to move obligations and release the original party.
  • Check the contract’s consent rules. Many agreements prohibit assignment before completion without written consent.
  • Consider a holdback as an alternative to warranty insurance for contingent liabilities.

Quick answer

Whether to sell a business by asset sale or share sale depends on tax, risk and administrative burden. Asset sales suit buyers but require every contract, vehicle and employee to be transferred individually. Share sales are simpler to implement but demand deeper due diligence. Where a capital gains tax event may exist, a private ATO ruling can decide the structure.

FAQs

What is the difference between an asset sale and a share sale? An asset sale transfers individual assets — plant, stock, goodwill and contracts. A share sale transfers ownership of the company itself, so contracts and staff generally stay in place. Each has different tax and risk consequences.

Why do asset sales create more work? Every contract must be assigned or novated, and assets such as vehicles must be transferred individually with registration and stamp duty.

What is a holdback in a business sale? A holdback retains part of the price or assets after completion as security against contingent liabilities such as tax or employment claims, sometimes used instead of warranty and indemnity insurance.

About the authors

Peter Nevile – Peter was the Principal lawyer responsible for this matter and led the negotiation of the transaction with an international acquirer. He advises on business sales, transaction structuring and commercial agreements.

Meng Cheong – Meng was the lawyer who assisted throughout, including preparing the sale agreement schedules and drafting the deeds of assignment and novation that allowed the vendor’s rights to be transferred and the company ultimately released.

 

This article provides general information only and is not legal advice. It is based on our experience of a particular matter, with identifying details omitted or generalised. You should obtain specific advice before acting on any matter discussed here.

A note on scope: this article draws on the facts of the matter and general transactional practice. It does not analyse how a court would decide any issue.