In the business world, selling a business (or buying) is never straightforward and often comes with a plethora of complexities, particularly around the different structures which may be employed. These narrow down to two different methods (and sometimes a combination of the two).
One option is to buy the shares of the company that owns the assets; alternatively, assets, which make up the business, can be bought from the company.
It is important to note the following: –
- If the buyer purchases shares in the company, all its assets, liabilities and obligations (even those which are oblivious to the buyer) are automatically acquired.
- If the buyer purchases the assets, then only the assets (and liabilities) which the buyer agrees to obtain and which are identified in the sale agreement, are acquired.
Shares vs. Assets?
In a share purchase scenario, the buyer will acquire a company owning a business and running it as a going concern, with the contracts in place and continuing under new ownership (subject to any change of control provisions). It is often the subject of lengthier acquisition documents as the buyer who is buying the shares would like to protect themselves in respect of any hidden liabilities within the selling company by requiring warranty protection and tax covenants, as applicable.
On the other hand, an asset purchase is not void of its own problems which are, ever so often, rather complex compared to a share purchase. This is because an asset purchase requires the seller to transfer each of the separate assets which form the business and to obtain approvals of any third-party contractors or funders.
In an asset purchase scenario, contracts or existing trading arrangements are not automatically transferred (other than employment contracts in a relevant transfer) to the buyer, and these will need to be amended or assigned to the new owner, which will require the co-operation of the contractor.
The buyer has a greater amount of flexibility in an asset purchase as they get an opportunity to choose the assets they wish to acquire, which is not possible in a share sale unless the desired assets are transferred to a separate company by the seller before the sale takes place.
Often, the attitudes of third party customers, suppliers, funders, and how the prospective buyer intends to integrate the target business plays a key role in determining if the buyer will opt for asset purchase or share purchase.
Taxation issues involving both parties play a yet another important role when determining the appropriate method of business transfer. As a general rule, share purchase has tax advantages for the seller. On the other hand, an asset purchase is often more tax efficient for a buyer.
Other factors to consider are legal, financial and personal considerations when selling a business. As both share purchase and an asset purchase can be notoriously complex, any prospective buyers or sellers should seek appropriate professional advice at an early stage.