Approaching the sale or purchase of a business can often be a daunting prospect for both sides of the sale. The default position for a seller of a business is to simply offload their shares to a buyer, however there are multiple ways the sale of a business can be structured.
When purchasing a business, the two most common structures are a share sale and an asset sale. The key difference lies in what the buyer acquires.
Asset Sale
In an asset sale, sometimes referred to as the ‘cherry-picking’ approach, the buyer acquires specific business assets and selected liabilities. The seller retains ownership of the legal entity itself, meaning the company (not the shareholders) typically receives the sale proceeds.
Assets may include:
- Tangible assets: machinery, equipment, inventory, property
- Intangible assets: customer lists, intellectual property, brand names
Pros:
- Reduced risk for the buyer, who can exclude assets or liabilities they do not wish to acquire. This may reduce reliance on warranties and indemnities.
- Sellers can retain parts of the business they do not wish to dispose of, making this structure useful for partial disposals or streamlining.
Cons:
- Asset sales can be more complex due to the need to transfer individual assets and obtain assignments or consents from third parties.
- Potential double taxation, as the company may pay tax on gains, and shareholders may also pay tax on distributions of the proceeds.
It is important to consider with an asset sale, that individual transfers are required for each asset including for property, contracts, employees and intellectual property. This naturally can result in the legal process being more complex and taking longer to complete.
Share Sale
In a share sale, the buyer acquires the majority (or all) of a company’s share capital from its shareholders. The buyer therefore acquires the legal entity itself, including all assets and liabilities – often referred to as purchasing the business ‘warts and all’.
Pros:
- A cleaner form of acquisition, as ownership of the company simply transfers to the buyer, often making the transaction less operationally complex.
- Different tax treatment applies compared with an asset sale, and buyers do not typically incur VAT on share purchases. Stamp Duty applies at a flat 0.5%.
Cons:
- Buyers inherit all existing and potential liabilities of the company, increasing the need for robust warranties and indemnities.
- Due diligence can be more extensive and can become a point of negotiation between the buyers and the sellers.
The key element of a share sale is that the company retains its legal entity before and after the transaction. This means all elements of the business often remain in place such as operational contracts, employment agreements and intellectual property, resulting in a smooth transition for employees and contractors.
Why Expert Guidance Matters
Receiving the correct legal and tax advice is often essential in how the sale of a company is structured. The fundamental principles to takeaway are that the seller needs to prepare for any concerns the buyer may have, and the buyer needs to fully understand what it is they are purchasing.
Nockolds has a highly experienced Corporate and Commercial team, well-versed in advising on both asset sales and share sales from both buyer and seller perspectives. If you are planning to buy or sell a business, please get in contact with the Corporate and Commercial team at Nockolds to discuss which is the right path forwards for you.