Written by Alvin Ittoo, Head of Corporate
As a team that specialises in assisting buyers and sellers of businesses, one of the most common questions we get relates to the difference between an asset and share sale or purchase. Both structures can help you achieve the objective of buying or selling a business but they will involve different approaches to the transaction and different risks.There are advantages and disadvantages to each structure and so it is important to understand what is best for your transaction.
Share Purchase v Asset Purchase
When a business is operated via a limited company it can be bought or sold by way of a share purchase or asset purchase. Broadly speaking a share purchase will involve the buyer purchasing the shares in the company. This could be a portion of the shareholding of the entire share capital. The owners of the shares will be the sellers and once the purchase is complete the buyer will own the limited company (or portion thereof if only buying some of the shares). That limited company continues, at all times, to be a separate legal entity and owns the assets which collectively form the business such as intellectual property, physical property, customer lists and key contracts. This does not change at any time and all that is happening is that ownership of the shares is passing from seller to buyer.
An asset purchase, on the other hand, is where a buyer acquires certain assets which form part of the business. In this scenario the limited company remains in the hands of its owners and the buyer just cherry picks the assets and rights it wants to take on. This will usually include intellectual property rights, customer lists, property rights and stock and may also involve the buyer taking on some liabilities. The seller will be the limited company and the sale proceeds will be paid to that company in the first instance. The limited company will also retain any assets not identified as part of the sale.
Buying or selling your business? Which structure should you choose?
There are a number of differences between the two deal structures and, naturally, some pros and cons of each which lead to a number of considerations.
Clean Break?
A share purchase will typically give a seller a clean break as the buyer is purchasing the entire company “warts and all”. Absent of any specific agreement to the contrary, the seller can walk away having handed over the liabilities of the business. For this reason a share sale is often preferable where the seller intends to retire or move on to something new.
The counterpoint to this is that a share sale will generally involve the seller giving extensive warranties and indemnities in respect of the business. These are assurances in regard to aspects of the business and limited company and if they prove to be inaccurate it can give rise to a claim. This liability is negated by a disclosure process whereby the seller makes disclosures to the buyer to qualify the warranties given.
These warranties and the disclosure process can lead to a share purchase typically being more involved. Generally a share sale can be a lengthy process and can involve extensive negotiations as to the terms of the principal documentation, namely the share purchase agreement.
Cherry Picking
As asset sale affords the parties control over which assets of the business are being transferred as part of the sale. From a buyer’s perspective this means that it can pick what it wants and leave behind assets or liabilities it has no interest in purchasing.
This is not possible in a share sale as the buyer is purchasing the entire company – the good, the bad and the ugly.
This luxury does carry some disadvantages however there may be a requirement to obtain third party consents in order to transfer some assets. For example, if an asset purchase is to include the benefit of a lease the parties will need to seek landlord approval for the transfer. This involves additional input from property law specialists to assist with the assignment of the lease and Land Registry registrations. Similarly, certain key contracts may not be freely transferable and thus consent will need to be obtained. On the other hand, in a share sale nothing changes as far as the internal business. The company remains party to those key contracts or leases as they are not transferring to the buyer, the company itself is and so consent will generally not be needed.
Sale process and due diligence
The advantage of a share sale is that, whilst the process between the lawyers and accountants can be a little complex, these matters are generally conducted quite discreetly. This means that the seller can avoid notifying employees, customers and other key parties at an early stage and thus avoid disruption. In contrast, the nature of an asset sale is such that it is not possible to retain the same level of discretion. Parties to key contracts may need to be informed early in order to obtain consent and this means some level of disruption is often inevitable.
In terms of due diligence, the process will generally be more time consuming when dealing with a share sale. This is because, as mentioned, the buyer in a share sale is buying the company with all of its liabilities and inherent issues. By comparison, due diligence in an asset sale is generally confined to the specific assets being purchased.
Employees
In a share purchase, as with third party contracts, nothing changes in terms of the company’s contracts with its employees. The employment contracts remain between the company and the employee as it is only the shares in the company changing hands. This means there is no change in employment rights, the roles of employees or anything else. If the buyer decides to make changes to the employment structure it can do so once it completes its purchase.
The situation is very different in an asset sale as the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) applies. TUPE does not apply to share sales.
Where TUPE is applicable both the buyer and seller will be subject to certain obligations which are designed to protect the employees of the business. In broad terms, TUPE will act to transfer the employment of employees from the seller to the buyer. It also becomes very difficult to dismiss those employees by reason of the transfer. It is very important that both buyers and sellers are fully aware of their obligations under TUPE when conducting an asset sale as failure to adhere to these can lead to significant financial implications. For this reason it is important to involve employment law specialists in an asset purchase where employees are an issue.
The one true certainty….taxes
A big driving factor behind a choice between an asset sale and share sale is the tax treatment of each deal structure. Whilst there are some tax benefits from an asset sale, such as the greater ability to benefit from allowable losses, broadly speaking there are greater tax benefits from a share sale.
The sales proceeds of a share sale are paid to the seller shareholders of the company and thus they may be liable to pay capital gains tax. Furthermore, selling shareholders may, in certain instances, be able to benefit from entrepreneurs relief which could result in a reduced capital gains tax rate of 10%.
By comparison on an asset sale there is a potential double tax charge if the seller is a limited company. Any gain on the sale of the assets will attract a tax charge and if the intention is to extract the sale proceeds from the company a distribution will need to be made to the shareholders. This may well be by way of a dividend and this will likely attract further taxation.
Whilst this gives you a general idea of the tax implications, it is important that any party to such a transaction take specific taxation advice. We work closely with our client’s accountants when dealing with the sale of a business in order to ensure that the legal structure of the deal is based on a clear understanding of the tax implications.
This gives you a flavour of some of the factors that should be taken into account when considering whether to sell or buy a business via a share purchase of asset purchase. In my experience there will also generally be some deal specific considerations and so it is important to involve advisors from the outset to discuss these, along with some of the points highlighted above, in order to ensure the correct deal structure is adopted.
For an initial discussion regarding the sale or purchase of your business please feel free to give me a call on 01273 447075 or email at [email protected].
