Unpopular opinion: Buying/selling shares is a better option than assets

For many in the real estate industry, buying their own agency is a long-held goal. But for those without business experience, the prospect can be daunting. That’s where legal advisers come in. Unfortunately, not all legal experts think the same, which is why legal advisers with specific real estate experience are crucial. O*NO Legal's - The Real Estate Agents’ Lawyer Kristen Porter shares why her advice is a little different to the norm.

When it comes to making the buying or selling leap, there are two main options – buying or selling shares in the agency or buying/selling the assets (ie rent roll).

You’ll probably find that most advisers will caution against the former. Instead, they’re more likely to recommend buying or selling the assets.

That’s because buying shares means you run the risk of inheriting the business’ skeletons in the closet, so to speak, such as debts and tax issues.

But we look at things differently. And that’s because buying and selling rent rolls is something we do every day, so we understand the risks and how to mitigate them.

And when those risks are mitigated, there are significant advantages to buying or selling shares, which outweigh the perceived risks and issues.

One such advantage is not having to have new management agreements signed or, depending on the state in which you’re based, assigning them.

Listing agreements don’t need to be re-signed either. And as a result, lost managements are much lower.

Essentially, everything that makes a business, a business, remains in place. Things like the branding, the website, and all digital assets, remain as they are, making life a whole lot easier for the new owners.

But even more important than that, is that existing employment and contractor arrangements also remain in place. The same applies to software contracts, and that means no data migration is required.

This all makes for a much easier transition.

Of course, the risks I mentioned earlier, such as debt and tax issues, don’t disappear. And if they’re not addressed, the consequences can be significant.

But, if you choose to use advisers that frequently deal with share sales in real estate agencies, then they should know how to mitigate those risks for you.

There are a range of ways we can do this. Perhaps the most important is to undertake a very detailed due diligence.

Your due diligence should cover financial, legal and operational factors, and should include very beefy warranties. Warranties are essentially promises that the vendor makes, and if those promises are misleading, you’re able to sue them.

A contingency amount can be used here.

In the same way you can pre-determine a retention amount for lost managements, you can also set aside a specific amount to cover any major issues, such as undisclosed liabilities, undisclosed or miscalculated tax, misleading warranties, undisclosed employee entitlements and the like.

In very large transactions you can also include insurance that covers the warranties, but often these aren’t required at the office level.

More and more buyers and sellers are beginning to understand the benefits of buying and selling shares as opposed to assets. We are seeing it much more frequently.

Selling shares also gives you more options.

You can make a total sale, or you can bring someone into ownership of your agency, such as welcoming a new business partner to assist with growth or be part of your succession plan – or you can put those golden handcuffs on your employees.

It’s all about doing it the right way, and there are several things to consider to ensure that happens.

I always suggest having a day 1 balance sheet prepared so that everyone knows the state of the company at handover day. 

All parties should also be across things such as what happens to the cash in the bank account and what amounts are set aside to cover things like tax liabilities, GST/BAS and franchise fees.

These types of checks and balances reduce the risk of unnecessary catastrophes.

On one occasion, our law firm saw a situation where someone had purchased shares, having assumed a certain amount of cash would be left in the bank account to cover tax, GST, super, employee entitlements/commissions payable to staff and some working capital.

Instead, the vendor had drained the account. This is a situation you’ll want to avoid!

It’s also important to think about whether lessor consent is required under the lease for a change in control – it’s the same with any franchisor consent. You need to know who deals with any issues arising from the next trust account audit.

On the surface, it does sound like a lot. And while there are plenty of considerations that go into buying and selling shares in agencies, as long as you follow the simple process set out by your advisers, it can be an incredibly effective option. 

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Kristen Porter

Kristen Porter is a legal practitioner specialising in real estate, property management and privacy laws. She is the founding Director of O*NO Legal The Real Estate Agents' Lawyer.

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