Ask any business broker, and they will tell you, selling a business is a markedly different exercise to selling a residential or rural property. This is particularly the case when selling a real estate business.
For many principals who don’t have their licence to sell businesses, knowing the ins and outs of what is involved in facilitating the sale of a business, or its assets, generally isn’t a great necessity.
But when it comes time for those principals to step back from and sell their own real estate business, understanding the different options available to them and what they mean, can not only make for a smoother process, but can lead to a better result for everyone.
Head of the commercial team at JemmesonFisher, Aston Chee, joined the EAC to provide some knowledge on selling shares in your real estate agency.
Share sales vs asset sales
The first thing to ask yourself when selling your real estate business, is exactly what you want to sell and how you want to sell it. While there are a lot of factors to consider, there are two main options available to you:
- Asset sale: an asset sale is exactly as it sounds, it is the process of selling some or all of your business assets to a new owner. While you retain the company structure, the purchaser might buy your equipment (furniture, desks even cars), records, contracts, rent roll managements, intellectual property or other assets.
- Share sale: in this case, the purchaser effectively buys the company itself, by purchasing its shares, therefore changing the majority ownership of the company. By buying the company, the purchaser is taking on all that the company entails — its assets, liabilities, all of its employees, and in the case of real estate, assets like its rent roll managements.
Though the difference between the two options might seem quite obvious, it is worth pointing out a purchaser buying assets can generally pick and choose which assets they want to purchase; they are not obligated to take all employees with them, or to purchase every printer. In a share purchase, the buyer cannot pick and choose.
Why consider a share sale?
JemmesonFisher’s Aston Chee says share sales are becoming more popular, “In my capacity running the commercial team, there is a greater trend towards share sale now. In the last fortnight, four out of six ‘business sales’ have been share sales, not asset sales.”
“As a vendor, selling shares in a business offers various benefits. Firstly, you are able to maximise your capital gains tax (CGT) benefits, with some sellers eligible to access a 50% CGT discount.”
Aston also says share sales can be a particularly valid option for sales of real estate businesses because they impact landlords much less than an asset sale.
“Share sales provide for less disruptions to your landlords as you don’t have to contact them or re-sign management agency agreements — you are able to maximise the value of your portfolio in these instances.”
When selling your business via share sale, the company structure remains in place, the purchaser just takes over controlling ownership. For this reason, the existing management agreements with landlords can remain valid and in place.
In contrast, if an asset sale is the method of purchase, the managements on the rent roll will now be taken over by an entirely different company; a new legal entity. The agreements that were in place were between the old company and the landlord, and don’t apply to the new company. When selling rent roll assets, the seller and purchaser will need to ensure every landlord signs a new agreement.
“A standard rent roll sale requires new agency agreements to be signed by each landlord. It is common to lose around 5-to-10% of listings in those transactions, so by selling by share sale, you stand to gain 5-to-10% value in your rent roll,” Aston says.
In an asset sale, a price is allocated to each management within the rent roll. For every landlord that will not sign a new agreement, the vendor loses that specified amount. Multiplied by 5-to-10% of a large rent roll, this can have a notable impact on the total sale price.
What should a purchaser look out for in a share sale?
According to Aston, when purchasing an agency through a share sale agreement, “A buyer needs to do fairly extensive due diligence. First, they need to assess the finances of the business, second, the rent roll itself.”
“With the rent roll, a purchaser needs to actually review the management agreements to make sure they are valid agreements — you only pay for those ones that are actually valid. The agreements that are defective — there may be one owner’s signature or incorrect licence number or entity name — those need to be rectified before they get to completion.”
“The value of the shares would be based on a multiplier — for example, if we’ve got 400 managements and 300 are fine, we’ll pay for 300, and between completion and the end of retention, the vendor can rectify those that are defective. The purchaser pays for the defective managements as they come in rectified, very similar to a rent roll sale.”
Protection of warranties
When selling via an asset sale, a seller can select which assets are for sale and a buyer can select which they choose to purchase. As noted, a share sale transfers responsibility for the entire company, liabilities, employees and all.
Inevitably, this transfer in its entirety can result in challenges down the track due particularly to the transfer of liabilities. For this reason, the seller in a share sale, is required to provide warranties for a select period of time. Warranties might include, for example, the seller guaranteeing they have paid all taxes so the new owner isn’t liable for those taxes, or that the company does own each of the assets that will be transferred with the company ownership.
While warranties do enable a purchaser to take legal action against a vendor, this approach is not always ideal.
The vendor might tell the purchaser that the tax is paid or the payroll is paid — but what happens if it’s not?
“Ordinarily, what we do is have the vendor set aside a contingent liability fund. What this fund does is cover any of those things that come up, like taxes or payroll, and fund those. The fund is held for a set period, preferably two years. This saves us from going down the path of suing the vendor under the warranty — it’s a more friendly approach,” Aston says.
Thinking of selling?
If you’re thinking of selling your business, doing your homework to ensure you select the right sales option — asset sale or share sale — will be one of your most important first steps. JemmesonFisher’s commercial team can provide some great insights and guidance, with special offers for EAC members.