In Australia, many people often confuse the concepts of “Acquiring a business” and “Acquiring a company” when considering business or investment opportunities. While these two terms may sound similar, their legal implications, acquisition methods, and subsequent responsibilities and obligations are quite different. Today, we will explore the distinctions between the two in detail and help you understand which option is more suitable in different scenarios.
What is a "Company"? What is a "Business"? Company
A company is a legal entity composed of shareholders, directors and being incorporated for certain business activities. It can own assets, enter into contracts, incur debts, and exists independently of its owners. In other words, a company is a separate legal entity capable of conducting business activities.
A business refers to a commercial trading activity, typically owned and operated by a company, individual, or other legal entity. A business includes specific commercial activities such as production, sales, and services, often involving assets like equipment, inventory, customer lists and intellectual property.
In simple terms, a company is an entity, while a business is the activity conducted by the company. A company can own one or more businesses, and a business can be operated by different companies or individuals.
Acquiring a Business vs. Acquiring a Company: Key Differences
When you buy a business, you are purchasing the assets of that business, including but not limited to:
- Equipment (e.g. kitchen equipment, machinery in factory operations, automobiles etc.)
- Inventory (e.g. merchandise stock, raw materials used in production etc.)
- Customer lists
- Lease agreements (e.g. rental agreements for shops and warehouses)
- Intellectual property (e.g. trademarks，patents and websites)
In this process, ownership of the business/assets transfers from the seller to the buyer, but ownership of the company does not change. This means you are purchasing the assets of the business, not the underlying company entity.
When you buy a company, you are purchasing the shares of that company. This means you become a shareholder, obtaining ownership and management rights over the company. All assets, liabilities, contracts, and businesses under the company will be transferred to you at same time.
Pros and Cons of Acquiring a Business vs. Acquiring a Company
- Lower Risk: You only purchase the assets of the business and do not inherit any historical debts, legal or tax liabilities, or employment risks of the company.
- Greater Flexibility: You can choose to operate the business under a new legal entity, avoiding conflicts with the existing company structure.
- Tax Advantages: In some cases, purchasing business assets may offer more tax benefits than acquiring company shares.
- No Ownership of the Company: You do not have ownership of the company, only control over the business assets.
- Complex Asset Transfer: The process of transferring various types of assets can be complicated.
- Full Control: You obtain ownership and management rights over the company and all its businesses and assets.
- Simplified Process: Purchasing company shares is often simpler than acquiring business assets, as you do not need to transfer each asset
- Assumption of Historical Liabilities: You will assume any historical debts, tax issues or other legal liabilities of the company.
- Higher Risk: If the company has undisclosed debts or legal disputes, you may face significant risks.
How to Choose: Acquiring a Business or Acquiring a Company?
- You want to take over an established business but do not want to assume the company’s historical debts or legal risks.
- You plan to operate the business under a new legal entity (e.g., a new company).
- You only want to purchase the core assets of a specific business under the company and do not want to deal with the company’s share structure or acquire the entire company.
- You want full control over the company and all its businesses and assets and retaining the company entity is more beneficial for the future.
- You are willing to assume the company’s historical debts or legal liabilities.
- You want to gain ownership of the company by purchasing shares rather than acquiring the business assets separately.
- If the target company has a complex structure (e.g., subsidiaries, affiliated companies), purchasing shares may be the only feasible option, as directly acquiring assets could involve multiple legal entities and be more complicated.
Legal Processes for Acquiring a Business and Acquiring a Company
Legal Process for Acquiring a Business
Due diligence is the first step in acquiring a business, ensuring you have a comprehensive understanding of its valuation and liabilities, permit and licensing issues and operations. Key aspects include:
- Financial Audit: Review the business’s financial statements, tax records, and debt situation.
- Legal Compliance: Verify that the business complies with relevant laws and regulations, such as necessary licenses and permits.
- Contract Review: Examine existing contracts, including lease agreements, supplier contracts and customer contracts.
- Intellectual Property: Confirm the legality and validity of trademarks, patents, and copyrights.
- Fixed Asset Inventory: Obtain and verify the list of fixed assets and check for any encumbrances or security interests.
After completing due diligence, the buyer and seller enter contract negotiation stage. Key tasks include:
- Purchase Price: Determine the purchase price and payment terms.
- Asset List: Specify the assets being purchased, including equipment, inventory and customer lists.
- Transition Arrangements: Define pre- and post-completion transition arrangements, such as training or support from the seller.
- Warranties and Indemnities: The seller provides warranties regarding the business’s financial status and legal compliance and agrees to indemnify the buyer for any issues.
Once negotiations are finalised, lawyers prepare the necessary legal documents, including:
- Asset/Business Purchase Agreement: Details the assets, price, payment terms and completion date.
- Assignment Deeds: For transferring lease agreements, supplier contracts, etc.
- IP Assignment Deeds: For transferring trademarks, patents and other intellectual property.
After signing all legal documents, the transaction enters the completion phase. Key tasks include:
- Payment: The buyer pays the purchase price as agreed.
- Asset Transfer: The seller transfers the business assets to the buyer.
- Notification: Notify relevant parties, such as government authorities, customers and suppliers of the change in ownership.
Legal Process for Acquiring a Company (Buying Shares)
Due diligence for acquiring a company is more complex, as you will assume its historical debts and legal liabilities. Key aspects include:
- Financial Audit: Review the company’s financial statements, tax records and debt situation.
- Legal Compliance: Verify compliance with laws such as the Corporations Act, employment laws and regulatory requirements.
- Contract Review: Examine key contracts, including leases, supplier agreements, employment contracts and customer agreements.
- Litigation and Disputes: Check for any past and ongoing litigation or legal disputes.
After completing due diligence, the buyer and seller enter contract negotiation stage. Key tasks include:
- Purchase Price: Determine the purchase price and payment terms.
- Share Transfer: Specify the number of shares being purchased and the transfer method.
- Warranties and Indemnities: The seller provides warranties regarding the company’s financial status and legal compliance and agrees to indemnify the buyer for any issues.
- Transition Arrangements: Define post-completion transition arrangements, such as training or support from the seller.
Once negotiations are finalised, lawyers prepare the necessary legal documents, including:
- Share Purchase Agreement: Details the shares, price and payment terms.
- Shareholders Agreement: Outlines the rights and obligations of shareholders.
- Board Resolution: A resolution by the company’s board approving the share transfer.
After signing all legal documents, the transaction enters the completion phase. Key tasks include:
- Payment: The buyer pays the purchase price as agreed.
- Share Transfer: The seller transfers the shares to the buyer.
- Notification: Notify relevant parties, such as ASIC (Australian Securities and Investments Commission) and other relevant regulatory authorities and stakeholders, of the change in ownership.
Conclusion
When investing in Australia, whether you choose to buy a business or a company, it is essential to carefully consider the pros and cons and the applicable scenarios. Acquiring a business is more suitable for those who want to take over an established operation without assuming historical liabilities, while acquiring a company is ideal for those seeking full control over the company and its assets.
Regardless of your choice, we recommend seeking professional legal and financial advice during the transaction process to ensure you are fully aware of the transaction you are going to make. If you have any questions about acquiring a business or a company, feel free to contact us.
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