We recently invited Scott McGregor, Commercial Broker at Mortar Finance to a webinar on the topic, ‘Funding Your Next Business Acquisition.’ We asked him if he had any insights into the two main purchase structures.
Here’s what he said -
In regards to the shares in the business, if you are buying shares in the business there are whitewash provisions. It's a section in the Corporations Act that we need to be aware of when buying shares in the business, and it can particularly be triggered if the business is providing a guarantee back to those owners to link in the income from that business, so it is something we need to be careful of. Banks and finance brokers will engage with accountants and bank's internal lawyers to make sure that process is completed correctly and doesn't leave anyone exposed to any sort of breaches of the Corporations Act. That is certainly one instance where someone will just come in and buy the owner shares in that business and continue to trade that business.
Other instances are where you come in and particularly you buy the business, and brand. You may change the brand of the business and roll that up into your own business. That probably comes down to a conversation with your accountant as to the most appropriate structure for you in terms of funding that business.
Regardless of the structure you decide to proceed with; whether you're going to buy shares or the business as a going concern, and whether you're going to structure that as a company, a trust, or a sole trader - as long as the banks can understand that structure and how that's going to work and identifying any potential implications around whitewash provisions. The bank's will work with that structure to provide a finance arrangement.
It may vary some of the information that needs to be provided and also the way the security is structured because you don't get a director's guarantee. For instance if it's a sole trader who is buying the business, the sole trader is automatically liable. Those sort of things will need to be understood and confirmed when we present something to the bank.
Structure is relevant for every party - the lawyers, accountants, bank, and the owner are involved, so if there are future parties buying into the business and there are more acquisitions and personal tax positions, it will all come into consideration when setting up what sort of structure you're going to go with when you buy that business.