Buying or Selling a Business: Shares or Assets?

 

The Fundamental Difference

Share Sale or Purchase:  this involves the buyer acquiring all the shares in the company of the target business from the shareholders

Asset Sale or Purchase:  this involves the buyer acquiring specific assets of the target business (and certain liabilities) from the company

 Considerations for a Seller

 

Share Sale:

  • The only asset being transferred is the shares
  • It results in a ‘clean break’ for the seller
  • The sale process may take longer and the due diligence investigations will be more extensive as the buyer will want to thoroughly investigate the company
  • The buyer will expect extensive warranties and indemnities
  • The shareholders receive the sale proceeds directly
  • No third party consents are required to transfer the assets or contracts (unless a contract contains a ‘change of control’ provision)
  • No conveyance or assignment of the property is required
  • All employment contracts remain in place
  • In relation to Tax:
  • CGT will be payable, but this may be reduced to 10% through Entrepreneurs Relief
  • Potential for roll over relief to the extent any consideration is deferred (loan notes) or consideration shares in the buyer are issued to the seller

Asset Sale:

  • The seller retains ownership of the company and the buyer can ‘cherry pick’ the assets it wishes to purchase
  • Exactly what is being purchased must be identified in the asset purchase agreement
  • The sale process may be quicker and less extensive due diligence undertaken by the buyer, although this is not always the case
  • Legal ownership of the relevant assets (and liabilities) must be individually transferred or assigned to the buyer
  • Third party consents to the transfer of all the contracts (and certain assets) will be required
  • The sale of the business premises (or assignment of the lease) will have to be negotiated and transferred separately
  • The employees will (in most circumstances) transfer to the buyer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)
  • In relation to Tax, the seller is effectively subject to double tax:
  • Corporation tax on the profit from the sale of assets; and
  • Capital gains tax on cash withdrawn by the shareholders as a dividend

Considerations for a Buyer

Share Sale:

  • Continuity of the target business
  • No obligation to consult with employees
  • No third party consents required (unless there is a ‘change of control’ provision)
  • Buying the company ‘warts and all’
  • Adequate warranties and indemnities will be required from the seller in the share purchase agreement to protect the buyer’s position
  • In relation to Tax:
  • Stamp duty is payable on the transfer of shares
  • There is no SDLT

Asset Sale:

  • Agree exactly what assets (and liabilities) will transfer
  • Less risk for the buyer than the purchase of the entire company
  • Need third party consent to transfer the contracts, with no guarantee that such consents will be forthcoming
  • The employees will transfer under TUPE, which can have implications for an unwary buyer
  • SDLT will be payable on the transfer of property, although some reliefs may be available in terms of corporation tax relief, roll over relief, etc.

Which should you choose?

This will depend upon the circumstances of the buyer and the seller.  There may be reasons why one structure is more favourable.  There will be both legal and tax considerations, so it is important for a seller or buyer to take legal and financial advice at an early stage.

 


 

For more information or for answers to specific questions on a business sale or business purchase contact our

corporate team on

0161 926 9969 or corporate@mlplaw.co.uk