If you’re buying a business or selling a business, you must consider if you should buy the shares of the company comprising the business, or the assets of the business directly from the company itself.

To help make the decision, let’s cover what both terms actually mean. Look look at Share Sales v Asset Sales.

But first, if you’re new here, my name is Steven Mather and I’m a business sale solicitor based in Leicester but working with clients nationwide on business sales and purchases.

What is a share sale?

In a share sale, you buy shares in the company instead of just the assets.

You buy the company as a separate legal entity, and the company typically continues to retain its assets and liabilities. The transaction exists between the company’s shareholders and the buyer of the shares, and it is just the composition of the ownership of the company that changes.

Advantages of a share sale

As a buyer, where the company has recognised brand, goodwill and reputation, it may be preferable to buy the business by way of a share sale in order to capitalise on the company’s brand, goodwill and reputation.

As contracts, business names, leases and intellectual property are already in the name of the company, you don’t have to formally assign contracts and other property – negating the need for third party consents.

Last but not  least, stamp duty land tax is not payable in a share sale on the property prices (unless the selling company is ‘land rich’) – although you do have to pay 0.5% stamp duty on the purchase of shares.

Disadvantages of a share sale

Because you as the buyer become the sole shareholder in the company, you take on all past, current, future and contingent liabilities of the business on completion (including any tax liabilities of the company).

Even if the seller provides an indemnity for the liabilities incurred by the company up until the date of completion, unless an amount representing the value of the indemnities/ warranties is held on trust as security (or a bank guarantee), there is the risk that the seller may not have the funds to indemnify you if called upon to do so.

To mitigate the additional risks associated with a share purchase, you must usually engage in extensive and detailed due diligence in order to detect liabilities and risks associated with the selling company.

What is an asset sale?

An asset sale involves the purchase of some or all of the assets owned by a company.

Examples of common assets you could purchase include plant and equipment, buildings, land, machinery, stock, goodwill, contracts, records, and intellectual property. The transaction exists between the company and the buyer of the business assets. The seller retains ownership of the company structure.

Advantages of an asset sale

As a buyer, the liabilities remain with the seller company and do not transfer to you. If you want to, you can pick and choose the assets you want and leave unwanted assets with the seller. In some instances, you may agree to take on some liabilities of the business.

For example, if employees are transferred across from the seller company to your business as part of the transaction, you might agree to take on the accrued employee entitlements – subject to a reduction in the purchase price for the assets.

Subject to certain criteria, the sale may be classified as the sale of a ‘going concern’, which may result in no GST being payable on the transaction.

Disadvantages of an asset sale

Disadvantages of an asset sale to you, the buyer, include:

• Stamp duty may be payable on the transfer of land and other real property
• Third parties may refuse to consent to assign contracts which you consider to be vital to your decision to purchase the business.
• The seller will often require you to offer employment contracts to all current employees which are substantially similar to their current terms.
• Some assets, such as government licences and permits, may not be assignable.

Share sale vs. asset sale

Although there are advantages and disadvantages for both buyers and sellers associated with a share sale and asset sale transaction, there are ways to mitigate risks that are associated with each type of transaction.

It’s important to understand the commercial, taxation and legal risks associated with both types of transactions to select the most suitable type of transaction for the particular sale.

For further information and advice on the best way forward if this is your situation, please get in touch.