If you are looking to purchase a business operated by a limited company, there are two common ways of acquiring the business: a share sale or an asset sale. The key difference between the two is in the nature of what the buyer will acquire.
In a share sale, the buyer purchases the shares of the company and therefore acquires the company as a whole, including the business and any assets of the company but also all liabilities (unless expressly agreed otherwise). The business can continue to run on a ‘business as usual’ basis.
In an asset sale, the buyer and seller agree which assets and which liabilities, if any, will transfer. The seller retains ownership of the company that previously operated the business and will have to take steps to close it down and deal with associated liabilities. The assets that the buyer acquires can be both tangible (property, land, machinery and stock) and intangible (intellectual property and goodwill).
The pros and cons (from both a buyer and a seller’s perspective)
- A share sale transaction is simpler for the seller than an asset sale as the company is sold as a ‘going concern’ in totality
- Negotiations can be discreet as the business will carry on as usual after the sale. There is no need for the seller to notify employees, customers or suppliers in the early stages
- There is 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
- Employees’ contracts of employment with the company remain in force, meaning there is no need for consultation
- A share sale is usually significantly more tax-efficient for the seller than an asset sale
- A share sale involves a greater risk for the buyer than an asset sale because of the level of liabilities the buyer may be exposed to
- The buyer will expect the seller to give extensive warranties and indemnities as protection against unknown liabilities
- A buyer may negotiate a discount to reflect the increased risk
- An asset sale generally involves the buyer taking less risk and therefore the negotiation of the sale contract is generally more straightforward, with fewer warranties and indemnities to negotiate.
- Due diligence may be less intensive than for a share sale.
- The seller can retain the parts of the business of value to them.
- An asset sale is generally not as tax efficient for the seller as a share sale. The seller will have to pay 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
- 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 a far less discreet option
- Third party consent will be required to transfer all supply contracts, licences and any other permissions that might be needed to operate the business, with no guarantee that this will be achieved. This could impact on the sale price
- Separate negotiations will be required to transfer ownership of any business premises. If the premises from which the business operates are leasehold, this will require additional negotiations with the landlord and the landlord’s solicitor
- The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) are likely to apply to employees of the business. If TUPE does apply, the seller must consult with all employees individually about the sale
- The company will still belong to the seller at the end of the transaction and they will need to deal with this properly e.g. by winding the company up (if appropriate) and paying all existing liabilities and debts and disposing of the retained assets before taking the net cash proceeds.
Our Corporate and Commercial Team specialises in helping buyers and sellers of businesses. If you are considering purchasing or selling a business, get in touch with a member of the team to discuss the best option for you.