A business can be sold for the purposes of enterprise or equity. Typically, a greater risk equates itself with equity sales as opposed to enterprise sales. The reason is that acquiring the shares enhances the likelihood of contingent claims. These claims, notably those of the business’ past or current employees and consumers, as well as the Australian Taxation Office (ATO), may not be noticeable at the time of sale. Purchasers in these situations therefore aim to reduce risk of these claims by obtaining warranties from the seller of the business and undertaking widespread due diligence.
The majority of business sales are of the assets exclusively (intellectual property, equipment etc.). In these circumstances, a purchaser will often establish a new entity or merge the assets to an existing entity. This allows the purchaser to avoid exposure to the vendor’s actual or contingent debts.
Conversely, in the case of a business sale by a liquidator, employee entitlements can pass onto the purchaser under specific circumstances. Most often, the purchaser is unaware of such liabilities that are transmitted to them. So, if you are considering the purchase of a business from a company in liquidation, it is critical to ensure that irrespective of whether there is transmission of employees or not, that the sale contract specifies the termination of all previous employees, that the seller holds sole responsibility of any claims made by former or current staff/workers and that the purchaser holds no liability for the seller’s past employees. By doing this, the purchaser can rest assured that they will not be liable for any employee claims.
If you require any assistance in relation to selling or purchasing a business, or think this situation may apply to you, you are welcome to contact our team of experienced commercial and corporate property lawyers by clicking here to submit an online enquiry form, calling us on 1300 QUINNS or alternatively, +61 2 9223 9166 to arrange a teleconference or appointment.