Company Shares vs Re-Signing New Managing Agency Agreements
There are pros and cons when it comes to acquiring a rent roll or agency with shares in the company that holds the agency agreements, versus re-signing all new agreements in to your company or from the vendor's company. Vendors are increasingly requesting the sale of company shares, rather than re-signing new agreements during our first appraisal meeting.
For the vendor there is a clear upside... or is there?
For the purchaser the question is whether the company has traded as the main agency for sales and property management for some time? If this is the case there could be future risks you are unaware of.
These are my top considerations designed to help you decide whether or not to sell shares in your existing company:
No need to re-sign Agency Agreements. The retention of all your existing owners should be 100% as soon as you settle. However, how are you going to communicate the news to all your clients including your owners? The new owners can't remain a secret, even if the trading name and all the staff remain in place. People talk, especially staff, and you should implement a clear communication plan and strategy to present to the market. Retention will be different under a share sale.
Price. When selling the shares in a company purchasers will sometimes ask for a reduction price, to offset the risk they are taking acquiring the shares in your company. If you’re lucky, price will be the same as a re-sign of managing agency agreements.
Retention. Whenever I’ve sold shares in a company the retention historically takes longer. The reason for this is because a re-sign or the “shaking of the tree” will happened before settlement. The seller will know exactly which landlord is staying and which are going. When selling the shares, the “shaking of the tree” happens after settlement and this gets done by the purchaser. It's important to consider which approach you would prefer.
Taxation. There are capital gains advantages as well as small business concessions on the transfer of the shares in the company. Check with your accountant what these are and how much you are entitled to. However, all your tax affairs need to be in order, and all tax paid up to date, therefore with a share sale any tax burdens are brought forward to before, or on, the date of settlement.
Due Diligence. Is this the only corporation entity you’ve traded? Are all the revenue and expenses run through this entity? Are all the staff employed by this one entity? If the answer is 'yes' to all of these questions, then expect a very extensive due diligence on the corporation as well as the accounting on the trading entity and employment agreements.
Compliance of Managing Agency Agreements. Are all your MAAs 100% compliant? Are they all executed correctly, with the correct names of principals as individuals, companies and superannuation funds? Expect that the purchaser will review all of these agreements and if any are legally non-compliant, then they may be excluded or need to be rectified prior to settlement.
These are just some things to consider when acquiring or selling the shares in a company in order to purchase or sell a rent roll.
I welcome any questions buyers or sellers may have at any stage. Please contact me, Matt Ciallella, to discuss your particular situation on 0414 668 972 or matt@mcrrb.com.au.
