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We commonly get asked:
“what structure is best for the sale of my business?”
"what are the pros and cons of an asset sale as opposed to a share sale?"
"does it really matter?"
In short, yes it does really matter!
The preferred transaction structure for your business is dependent on several factors; you need to consider the nature of each structure and the key advantages and disadvantages, which are addressed below.
WHAT IS A SHARE SALE?
A share sale is the purchase of shares in a company.
Generally, in a share sale, all the assets and liabilities of the business remain in the company’s ownership and, where 100% of the shares are being purchased, the company as a whole is transferred to the buyer.
WHAT IS AN ASSET SALE?
An asset sale is the purchase of most or all of the assets owned by a company.
The buyer essentially purchases the key parts of the company that make up the business, which can include the following:
o company name;
o real estate;
o tangible property, such as machinery, equipment, vehicles, stock, land and property;
o intangible property, such as client data, customer and supplier contracts, intellectual property and good will; and
o in some cases, liabilities and debt.
WHAT ARE THE KEY ADVANTAGES AND DISADVANTAGES?
This really depends on whether you are a buyer or a seller, the company that is being transferred and your key objectives. The following are some of the common considerations from the perspective of both the buyer and seller.
If you are the buyer…
ADVANTAGES | DISADVANTAGES | |
SHARE SALE | Continuity As only the shares change hands, the employing and contracting entity remains the same after the transaction giving greater comfort to employees, customers and suppliers. | Increased level of due diligence
As every part of the company (including any liabilities) are being purchased, a higher level of due diligence is required, which increases the duration and cost of the transaction.
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| Control As the entire company is being purchased, the buyer gains control of every aspect of the company from day one. | Liabilities The buyer generally acquires the assets and liabilities of the company. If the company has a high level of debt or substantial liabilities this will be a cause for concern, which will need to be addressed. There may also be liabilities that are unknown at the date of purchase, which will become a liability of the buyer. |
| Simplicity The transaction essentially only entails the transfer of shares. Contract novation and assignment is not usually required. This means that less documentation is needed to give effect to the transaction, which can reduce the duration and cost of the transaction. | Stamp duty Stamp duty is usually payable as an additional tax at a rate of 0.5% on the sale of shares, where the value of the transaction exceeds £1,000. The buyer will need to factor this cost into the transaction value. |
ASSET SALE | Cherry pick The buyer is able to select which assets it purchases and which it leaves behind. This gives greater flexibility in relation to liabilities, which the buyer does not want to acquire. | Lack of continuity and increased disruption The employing and contracting entity will change, creating uncertainty for employees, customers and suppliers. This could result in employees resigning or customers and suppliers terminating their agreements. |
| Liabilities remain with the seller If the buyer is able to purchase the business as a going concern without liabilities, this means that the business will have a fresh start, free from debts. | Enforceability
Generally in a corporate transaction, the buyer retains the ability to sue the seller in relation to future breaches and liabilities.
In an asset sale, most or all of the value is stripped from the selling company.
This makes it difficult to bring or enforce a claim unless guarantees are sought from a parent company or individual sellers.
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| Objective valuation As the assets are being sold on an individual basis, it is generally easier to determine a fair price for each asset as opposed to the valuation, which is undertaken in a share sale. | Lack of simplicity All of the assets being purchased must be transferred separately; this results in a large number of documents being required. This generally increases the duration and cost of the transaction. |
If you are the seller…
| ADVANTAGES | DISADVANTAGES |
SHARE SALE | Clean break As all of the assets and liabilities of the company are usually transferred in a share sale, the seller does not retain any liabilities of the company, which provides a clean break. | Increased due diligence As every part of the company (including any liabilities) will become owned by the buyer, a higher level of due diligence will be conducted, which increases the duration and cost of the transaction. |
| Consideration The shareholder is the seller and the consideration belongs to them. This reduces the likelihood of double taxation and usually results in a quicker and more tax efficient realisation of capital. | Enhanced warranties and indemnities As the buyer usually acquires all assets and liabilities, a share sale includes enhanced warranties and indemnities which creates increased potential future liabilities for the seller. |
| Taxation Business Asset Disposal Relief, Substantial Shareholding Exemption and other tax reliefs may apply in relation to the capital gain. | Inflexibility If the seller only wants to sell part of the business, a share sale does not assist, unless a pre-sale restructure is undertaken. |
ASSET SALE | Flexibility
The seller is able to retain desired parts of their business.
| Liabilities It is common in asset sales for the seller to retain all liabilities, which means that the seller retains a high level of risk and future uncertainty. |
| Objective valuation As the assets are being sold on an individual basis, it is generally easier to determine a fair price for each asset as opposed to the valuation, which is undertaken in a share sale. | Consideration The seller is the company and therefore the consideration belongs to the company and not the shareholders of the company. This can result in VAT and corporation tax being paid on the sale of the assets. Taxation will also be payable when the consideration is withdrawn from the company. |
HOW SHOULD I STRUCTURE MY SALE OR ACQUISITION?
This largely depends on the business and transaction structure and your desired outcomes.
If you are thinking of selling your business or acquiring another business, FG Solicitors are experts in providing proactive, commercial and jargon free advice.
Contact us to find out how we can assist you with your corporate strategy!
WELCOME TO A MORE CONFIDENT FUTURE!
For further details about the corporate, commercial and employment legal services and assistance we provide to businesses, please click here. 👇
This update is for general guidance only and advice should be taken in relation to a particular set of circumstances.