If you’re buying or selling a company, there are two main routes to consider – an asset sale or a share sale. Each comes with its own advantages and downsides. In this article, we’re going to look at both, as well as the legal implications, so you can assess which is best for your needs.
When assessing the strengths and weaknesses of an asset sale vs share sale, it’s important to understand the basics. As the name implies, an asset sale involves the purchase of some or all the assets of the company, including property, equipment and intellectual property; the company itself is the seller, and its ownership does not change. In a share sale, the buyer purchases the company itself, usually by buying all of the shares in it.
Reduced liability – Perhaps the main benefit of choosing an asset sale is that the buyer doesn’t necessarily take on any of the seller’s liabilities other than those that pass to it by operation of law. This is because the purchase only applies to the assets that make up the business, to the company itself. This means that in principle an asset sale comes with less risk to the buyer. However, as we’ll see the agreement may be more complex.
Choice – The buyer can choose to leave undesirable assets behind. This can be useful if the buyer only wants to acquire certain parts of the business such as specialised equipment or intellectual property.
Due diligence – Asset sales tend to be simpler when it comes to due diligence, as the buyer is only concerned with the assets rather than the entire financial history of the business.
Pricing – As an asset sale has fewer risks for the buyer, there is less chance of securing a discount to mitigate against risk.
Complex contracts – The transfer of contracts and licences can be complex and involve third parties. This is just one of the reasons why it’s so important to take legal advice from a solicitor with experience in this area before moving ahead with an asset sale. For example, some contracts may have a ‘change of control’ clause that could trigger penalties.
Employees – The employees that are employed in a business transfer to the buyer by operation of the Transfer of Undertakings (Protection of Employment) Regulations 2006.
Tax – Depending on the assets involved, an asset sale is generally more complex than a share sale, due to the different classes of assets that can be involved. Potentially, the sellers can be taxed twice – firstly when the company is taxed on the gain made from the sale and again when any dividends arising from the sale are distributed to the sellers as shareholders.
Simplicity – In most cases, a share sale is often the simpler option for both parties, as the buyer acquires the company, which continues to own all of its assets, liabilities, contracts and relationships.
Tax efficiency – Share sales are usually more tax efficient for the seller.
Continuity – Since the company continues to operate as the same entity after ownership has changed, there is a sense of continuity for employees, customers and business partners.
Liability transfer – Since the the company retains its liabilities, as well as the assets, this may cause problems down the line if there are hidden legal, financial or tax issues. Once the transaction is complete the buyer assumes responsibility for the entire business.
Complicated due diligence – We saw that due diligence can be quite straightforward in an asset sale. That isn’t the case with a share sale as assessing all aspects of the business has a whole can take much more time
Asset sale vs share sale: legal implications
Whether you choose asset sale or share sale will depend largely on the unique circumstances of the buyer, the seller, and of course the business. While asset sales offer more flexibility and can limit the liabilities for a buyer, share sales can be easier to transact, provide higher post-tax proceeds for the seller and can provide a sense of continuity which can be beneficial for a going concern.
However, both types of sale can become complex for the sellers and the buyer, so it’s vital that anyone weighing up the pros and cons of a asset sales vs share sale secure advice from a firm of lawyers with a sound track record in handling these transactions. The decision is an important one, which is why we offer a free introductory call to anyone who is considering buying or selling a business. Before any element of the transaction begins, it’s important to ensure the foundations of the sale are solid so taking advice at an early stage is highly recommended.