With over two million actively trading businesses in Australia, there are numerous opportunities to acquire or invest in a business.
For many foreign companies, the acquisition or investment into an existing business in Australia offers advantages over establishing and growing a company organically. Investors from Asia, North America and Europe have been increasingly active inbound investors into Australian businesses via acquisition in recent years.
It is highly advisable to engage the appropriate Australian qualified, experienced and licensed legal and financial advisors to assist with a business acquisition in order to maximise value and reduce risks. Many accounting, business and corporate/investment advisory firms in Australia offer buy-side strategic advisory services assisting in all expects of a transaction including research, identification of potential opportunities and targets, negotiation, structuring and due diligence. Depending on the engagement, buy-side advisory firms usually operate on a fee for service basis such as a retainer and a success fee and offer the benefit of access to networks, independence and confidentiality.
It has been estimated that up to 50,000 Australian businesses come onto the market for sale each year. While many of these may be small businesses (i.e. less than 20 employees), it represents a potentially efficient pathway to enter the Australian market if executed correctly. At this time, the succession of retiring business owners is one of the increasing factors for the sale of SME businesses in Australia. This trend is expected to continue as the "baby boomer" generation seeks to retire.
It should also be noted that Australian businesses are increasingly expanding and taking advantage of trade opportunities in Asia via favourable free trade agreements and increasing linkages into Asian supply chains. Many Australian businesses are seeking capital to expand and access export opportunities in Asian markets. Conversely, Asian investors are seeking access to Australian supply opportunities. This is particularly the case for agribusiness where, in the mid-market, many agribusinesses are family-owned and operated, and require investment for R&D, innovation and productivity gains to support increased exports into Asia.
The Acquisition Process
Advisors can advise on the best type of transaction structure - including legal and taxation implications - that achieves the optimal commercial objectives. As in many markets, there are two common ways to buy a business in Australia. These are to buy the assets of the business or to purchase the equity (shares) of the company that operates the business.
Prior to undertaking due diligence, the seller may require a confidentiality agreement before information or documents relating to the business will be made available. Legal advisors undertake legal due diligence and focus on ownership, legal compliance, pending lawsuits, contingent liabilities, agreements and contracts in order to identify all legal risks associated with a business. Financial advisors or accountants undertake financial due diligence with a focus on financial status, tax considerations and pricing. Industry-specific advisors or environmental specialists may also be required in order to assess industry-specific issues and risks.
For small businesses, the Australian Taxation Office (ATO) operates Small Business Benchmarks for comparing performance against similar businesses in an industry sector.
Employees: As a general rule, when buying the equity in a business, existing contracts of employment at the date of sale continue to operate. When the assets of the business are acquired, the retention of staff is more complicated. In either case a buyer must fully understand and comply with their obligations.
Taxation: Prior to entering into the purchase, investors should consult legal/tax advisers to fully understand the potential tax implications of the transaction.
Target Entity Type: The target entity can take the form of companies, partnerships, joint ventures and trusts. A company limited by shares (proprietary/private or public company) is the most common form of business structure involved in merger & acquisition activity.
Financing: Cash, borrowing or a combination of these are common to fund an acquisition. Financing may influence the transaction structure and will usually require security over the assets of the business. Types of security may include fixed, or fixed and floating charges over assets, mortgage of the shares, personal guarantees and/or indemnities.
Insurance: M&A insurance to protect against breaching warranties which were agreed during the sale process is increasingly being used for mid-market transactions. A number of insurance providers offer M&A insurance in Australia.
Legal Documentation: The documentation to purchase a business often includes:
- Heads of Agreement (or Letter of Intent, Terms Sheet or Memorandum of Understanding) at the initial stages setting out key terms agreed in principle.
- Confidentiality Agreement - clarifies the disclosure of information on the target entity.
- Sale Agreement (sometimes called a Sale & Purchase Agreement)
Determination of any required approvals or consultation with regulatory bodies should be undertaken early and before proceeding with the purchase. Professional advice should also be sought. The confidentially agreement should be observed when approaching third parties and regulators and, where necessary, with the seller's explicit consent provided prior to consultation. Regulations
Listed Public Companies
A public company (i.e. Limited, Ltd) may be listed on the Australian Securities Exchange (ASX). When buying shares in a company listed on the ASX, the ASX Listing Rules must also be taken into account.
Australian Securities Exchange (ASX): The ASX is the largest stock exchange in Australia and the 9th largest listed exchange in the world. The ASX aims to provide an efficient market for financial securities. Listed entities must comply with the ASX Listing rules which govern listing, quotation, market information, reporting, disclosure, trading & settlement, administration, supervision and conduct. The Listing Rules are enforceable against listed entities and their associates under the Corporations Act.
In addition, the Corporations Act 2001 (Cth) limits the circumstances in which a person may acquire more than 20% of the voting power in a listed company or listed managed investment scheme, or an unlisted company with more than 50 members. These rules are complex and advice on whether the rules apply should be sought at an early stage in the process.