Both of these methods are likely to achieve the same commercial aim. However, there are key legal and tax differences which should be considered in the early stages of your purchase.
What is an Asset Sale?
In an asset sale, the potential buyer will take over the business by acquiring the assets which are required to run the target business. Such business assets may include:
- the goodwill
- key contracts
- fixtures
- fittings and equipment
- plant and machinery
- Intellectual Property Rights
- business records
- stock
- IT Systems
In an asset sale, it is common that the liabilities related to the business remain with the seller.
What is a Share Sale?
In a share sale, the prospective buyer will acquire the shares in the company which owns and operates the target business.
Effectively, this results in the buyer owning the company which owns and operates the target business. A registered company is capable of owning assets and liabilities in its own right. As such, all assets and liabilities commonly remain with the company when it is acquired.
Which method is right for me?
The structure of the transaction is often dictated by the party with greater bargaining power.
As the seller and current business owner, tax is often one of the biggest drivers for adopting a particular structure.
However, if your business is not operated by a company having a share capital, then a share sale is not possible. In other words, if you run your business as a sole trader or a partnership, then it can only be sold as an asset sale. As a result, this is usually the only exit strategy for many people looking to sell a small business.
The below highlights the key differences as well as the main pros and cons of each selling method for the seller.
What is being sold?
Asset Sale
The seller sells the assets which the parties agree will be transferred. The seller may have some control to retain some business assets. However, liabilities will often remain with the seller.
Share Sale
The seller usually sells the entire share capital in the target company. The potential advantage is that the buyer will be acquiring company “warts and all”. This will include debts and other liabilities of the company, as well as cash flow, employees and customers. This allows the seller to make a clean break from the company.
Formalities of transferring the business
Asset Sale
As the seller is selling a bundle of business assets, different formalities may apply for the transferring of each category of asset. Such formalities can sometimes make the transaction more complicated.
Share Sale
As the seller is selling a single asset (the shares), the transfer of the business can be a simpler process. However, to reflect the transaction, additional ancillary documentation is generally advised and adopted.
Receipt of sale proceeds
Asset Sale
Where the business is owned by a company, the sale proceeds are paid to the company. In order to extract the profits from the company, a dividend or some other form of distribution is usually required. This may have adverse tax consequences.
Share Sale
The sale proceeds will be received by the shareholders directly.
Tax
Asset Sale
In some cases, asset sales are generally less tax advantageous for the seller due to the exemptions and reliefs available in share sales. This is usually case by case, and specialist tax advice is necessary.
Share Sale
Typically, share sales are generally more tax advantageous for the seller due to the exemptions and reliefs available. This is usually case by case, and specialist tax advice is necessary.
Employees
Asset Sale
Employment contracts generally transfer automatically to the buyer pursuant to TUPE regulations. TUPE will place obligations on the Seller to inform, and sometimes consult with transferring employees.
Share Sale
The employees will not generally be affected by the transfer, as the employer will remain the same entity (i.e. the company).
Final Thoughts
The above are just some factors that should be considered before embarking on the sale of your business.
Has there been an opportunity to choose or negotiate the sale and structure of the transaction? Then you should seek out advice from lawyers and accountants as soon as possible.
This will help ensure that the best structure is adopted for you.
If you are thinking of selling a business and want to discuss your options, contact us on 03456 465 465 for a free initial conversation. The sooner we are involved, the more we will be able to help.
