Thinking of Buying a Business Through a Share Sale?  Here’s What You Need To Know.

If you are looking at buying a business, you have probably come across two main structures: an asset sale or a share sale.

A share sale agreement involves purchasing the shares of a company, meaning you take over the company as it exists — including its assets, contracts, employees, and liabilities. This structure is often chosen when continuity is critical, such as maintaining licences, ongoing contracts, or complex asset arrangements.

While a share sale can be a smart way to acquire an established business, it comes with unique risks that every purchaser should understand. Essentially, you’re stepping into the shoes of the existing owners, so knowing the pitfalls and protecting yourself is crucial.

Key Risks in a Share Sale

1. Hidden Or Undisclosed Liabilities
By acquiring the company as a whole, you inherit all its liabilities — whether disclosed or not. These may include tax debts, environmental obligations, employee entitlements, or pending disputes. If not identified through due diligence or managed via warranties and indemnities, they can create substantial unexpected financial exposure.

2. Inaccurate or Misleading Financial Information
Purchasers often rely on financial statements and forecasts. If these are incomplete, misleading, or inaccurate — such as overstated assets, understated liabilities, or unreported debts — it can distort the business’s true value and viability.

3. Weak or Breached Warranties
Warranties in a share sale typically cover finances, assets, contracts, regulatory compliance, and absence of undisclosed liabilities. If these are inaccurate or weakly drafted, the purchaser’s ability to seek compensation for losses post-completion may be limited.

4. Inadequate Due Diligence
Relying only on financial records or skipping thorough checks can leave serious risks undiscovered, including defective assets, unresolved disputes, poor governance, regulatory non-compliance, or inflated valuations.

How to Protect Yourself as a Purchaser

1. Conduct Comprehensive Due Diligence
Before signing a share sale agreement, undertake a thorough review of the company’s financial statements, tax records, employment arrangements, material contracts, compliance history, assets, liabilities, and corporate records. This process should verify the accuracy of the information provided and reveal any risks, disputes or potential liabilities.

2. Negotiate Strong Warranties and Indemnities
The share sale agreement should include strong warranties and indemnities that protect the purchaser from undisclosed liabilities, inaccurate financial information, and breaches of law. Clear consequences for any breach — including the right to claim damages — are essential. In some cases, purchasers may also negotiate escrow arrangements or holdbacks to secure potential claims.

3. Consider the Vendor’s Financial Position
Even well-drafted warranties offer little protection if the vendor lacks the financial capacity to satisfy a claim. Assessing the vendor’s solvency and financial standing is therefore crucial. If there are concerns, options include requiring a parent company guarantee, personal guarantee, or funds held in escrow.

4. Address Key Commercial Relationships
Identify any ongoing relationships between the vendor and the target company — such as consultancy arrangements, supply contracts, service agreements, licensing, or intellectual property use. These may need to be terminated, renegotiated, or documented as part of the transaction to avoid conflicts or operational disruption.

5. Plan for Post-Completion Integration
Consider how the business will be operated after completion. This includes assessing whether key employees, directors or consultants need to be retained to ensure continuity. If so, make sure appropriate employment agreements, retention arrangements, or contractor agreements are prepared and implemented.

6. Understand the Tax and Legal Implications
Purchasers should consider tax implications such as stamp duty (where applicable), the treatment of any earn-outs, and post-completion tax liabilities. Compliance with the Corporations Act 2001 (Cth) is also essential — including directors’ duties, financial reporting requirements, and restrictions on share buy-backs or financial assistance.

Final Thoughts

Buying a business via a share sale carries significant risks. Conducting thorough due diligence, securing strong protections, and careful planning are essential. Consulting one of our experienced commercial lawyers at Solari & Stock can ensure the agreement meets your needs, identifies potential risks, and safeguards your interests.

if you are thinking about purchasing a business and would like to discuss your options, please contact our Commercial Team of Michael Solari and Valentina Abouzeid. Reach out to us today on 8525 2700 or click on the Contact Us button to request an appointment.

Article by Valentina Abouzeid
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