As solicitors who specialise solely in acting for buyers and sellers of businesses, we are frequently asked what the difference is between an asset sale and a share sale and, more importantly, the pros and cons of each deal structure to the individuals we are advising.
Share Sale vs Asset Sale – Which Is The Best Deal For You?
Firstly, for completeness sake, it’s worth pointing out that the asset sale versus share sale debate is only relevant where the business for sale is operated by a limited company. If the business is owned by a sole trader, or a partnership, there will be no shares to sell so the sale will, by default, be an asset sale.
Secondly, every transaction is different, both in terms of complexity and the personal circumstances and objectives of the relevant parties. There really is no one-size-fits-all when it comes to deciding on a deal structure. It’s imperative, then, that both the seller and the buyer of a business take early advice from legal and financial professionals in order to fully understand the ramifications of the proposed deal before committing.
However, in terms of general principles, there are a number of key factors which distinguish a share sale from an asset sale:
Key Considerations For A Share Sale
1. Outcome – A share sale results in a clean break for the seller: the buyer purchases the whole company, including all liabilities (unless expressly agreed otherwise). On the face of it, this generally presents a better option for the seller. However, the buyer will expect extensive warranties and indemnities in the sale contract to mitigate its increased exposure to risk and this can often lead to protracted negotiations.
2. Sale Process – The business continues as a going concern, so negotiations can be discreet with no need for the seller to notify employees, customers or suppliers in the early stages. However, the pre-contract enquiries phase of the process (‘due diligence’) is generally more involved and costly than it is for an asset sale. This is because the buyer will want to thoroughly investigate the extent and nature of the liabilities that will transfer.
3. Third Party Contracts – There’s no need to get consent to transfer third party contracts to the buyer (unless they contain a ‘change of control’ provision): they remain in force with the company.
4. Property – No conveyance (freehold) or assignment (leasehold) of the business premises is required, avoiding the need for additional legal documentation and/or negotiations with a landlord.
5. Employees – Employees’ contracts of employment with the company, including those of key employees, remain in force meaning there is no need for consultation.
6. Tax – No Corporation Tax is payable by the seller if the company continues to trade under the new ownership. Individual shareholders will be liable to pay Capital Gains Tax but this may be reduced to 10% through the application of Entreperneur’s Relief. From the buyer’s point of view, the benefit of a share sale is that there is no liability to pay Stamp Duty Land Tax. The buyer will, however, pay Stamp Duty on the shares at 0.5% of the purchase price for transactions of more than £1,000.
Key Considerations For An Asset Sale
1. Outcome – The buyer and seller agree which assets and liabilities will transfer. As a result, there is less risk for the buyer and negotiation of the sale contract is generally more straightforward with fewer warranties and indemnities to negotiate. The seller retains ownership of the limited company and will have to take steps to close it down and deal with associated liabilities.
2. Sale Process – Due diligence may be less intensive than for a share sale, however, legal ownership of the relevant assets and liabilities must be individually transferred or assigned to the buyer. As well as being time consuming, this makes it impossible to keep the sale quiet.
3. Third Party Contracts – Third party consent will be required to transfer all supply contracts and licences etc with no guarantee that it will be forthcoming. This could impact on the sale price.
4. Property – Separate negotiations will be required to transfer ownership of any business premises. If the property is leasehold, this will require additional negotiations with the landlord and the landlord’s solicitor, which often causes a delay in the sale process.
5. Employees – The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) are likely to apply to employees of the business. The purpose of these is to protect employees’ terms and conditions when a business or undertaking, or part of one, is transferred to a new employer. If TUPE does apply, the seller must consult with all employees individually about the sale. Meanwhile, the financial consequences of TUPE for the unwary buyer can be significant. Both parties should seek early legal advice.
6. Tax – The seller will effectively have to pay double tax on an asset sale: Corporation Tax on the profit made from the sale of the assets and Capital Gains Tax on cash withdrawn as a dividend. The buyer is liable to pay Stamp Duty Land Tax on the consideration for any property that transfers.
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We are solicitors who specialise solely in working with business buyers and sellers. The sooner we become involved in the process of helping you to buy or sell your business, the better understanding you will have of the associated risks attached to different deal structures and the more likely it is that your transaction will be successful.
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