When deciding whether to buy or sell a business one of the first decisions for the parties will be whether the deal should be structured as a share purchase or an asset purchase. Although the commercial objective of the two structures is the same – the buyer acquiring the profits and related assets of the target business – the legal effect of the two transactions is very different. Whether a party is a buyer or seller will affect how they perceive the two alternatives and which they would prefer. Part of the negotiation process will involve agreeing which is the best method to adopt.
So what are the differences between the two structures and how do they each affect a seller and a buyer?
Share purchase and asset purchase – what is the distinction?
A company is a separate entity in its own right, distinct from its owners – the shareholders. Whilst the shareholders own shares in the company, it is the company that owns its assets and liabilities.
- A share sale involves the shareholders selling their shares in the target company to the buyer. The target company continues to operate its business and it is only the ultimate ownership of that company that changes. For employees, customers and suppliers of the business, it will appear to be “business as usual” as they continue to be employed by, and contract with, the target company. The sale may have little impact on their day to day business.
- With an asset sale, however, it is the target company itself which sells its assets (such as land, plant and machinery, contracts, debts, etc) to the buyer. To the outside world dealing with the business it will be obvious that ownership of that business has changed as it moves from the selling company to the buyer. The target / seller will continue to exist after the sale although, if it has sold all its assets and undertaking, it will be an empty shell.
So which structure is the best option?
There are a number of factors which the parties will take into account when deciding how to structure their deal.
On a share sale, the buyer will acquire the target company “warts and all” – whilst it will get all the assets that it needs to carry on the business, it will also effectively assume all the liabilities that come with an entity that has its own trading history. A buyer may prefer to use an asset sale to “cherry pick” only the assets it actually wants, leaving behind any assets and liabilities it is not prepared to take on. For this reason, a seller may prefer a share sale so it divests itself of the entire operation and is not left with any on-going liabilities or assets for which it has no further use.
On the other hand, an asset sale comes with a significant business disruption risk for a buyer. Will customers and suppliers be happy to continue to deal with the buyer after ownership of the business has changed? They may try to renegotiate more favourable terms as a condition to their contracts being transferred to the buyer. The buyer may prefer the less disruptive structure of a share sale to preserve the on-going goodwill of the business it wants to acquire.
If only part of the seller’s business is being sold, an asset sale may be the best route to ensure that the seller gets to keep the rest of its undertaking and only the target division is sold to the buyer.
The different tax treatment of the two structures will also influence the parties’ decision as will their relative bargaining strengths. In either case, a detailed due diligence investigation will help to uncover any issues in the target business and inform the final decision as to which structure to use.