Buying or selling a business - which method is right for you?

There are two common ways you can buy or sell a business. This is either by a share purchase/sale or an asset purchase/sale. Although the objective of each option is broadly the same, there are advantages and disadvantages to each. The decision of which method to choose will usually be reliant on the legal, financial, tax and personal position of the buyer and the seller.

What is an asset purchase/sale?

An asset purchase/sale involves the purchasing/selling of the assets and rights of a target business. The buyer may also assume responsibility for certain liabilities of the business.  Assets can be tangible and intangible and typically include business information and records, the benefit of business contracts, intellectual property rights, business premises, lease of premises, stock, goodwill, employees, plant and machinery.  

The buyer may wish to purchase all of the assets or cherry-pick the assets they wish to purchase with the remaining assets staying with the seller. This is something for the parties to negotiate on and the terms of the asset sale will typically be recorded within an Asset Purchase Agreement. An asset purchase/sale will always be the option if the business is a sole trader or partnership, whereas a company has the option of either an asset purchase/sale or a share purchase/sale. Like any transaction, there are advantages and disadvantages which are outlined below.  

Advantages and disadvantages of an asset purchase/sale

Examples of advantages for the buyer/seller:

• The parties can choose which assets and liabilities (if any) they wish to purchase/sell;

• There is less due diligence due to the ability to choose which assets are involved in the sale;

• It is unlikely that the transaction will need shareholder consent or any other shareholder involvement; and

• There is a lower risk for the buyer to assume undisclosed liabilities.

Examples of disadvantages for the buyer/seller:

• There potentially may be a double tax implication; once on the gain made from the sale of the assets and again when the sale proceeds are distributed;

• Suppliers or customers who have automated payments to the business will need to be transferred to the buyer at completion. This may cause existing suppliers or customers to take their business elsewhere; and

• The seller must adhere to the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) if transferring employees.  Failing to do so can result in financial sanctions.

What is a share purchase/sale?

A share purchase/sale is where the shares of the target company are bought/sold.  The entire issued share capital or the majority of the share capital are purchased from the selling shareholders of the target company.  

The terms of the sale or purchase will usually be found within a Share Purchase Agreement, albeit there is no legal requirement for an agreement to be in place.  By having a Share Purchase Agreement in place, both parties have certainty of terms on which they bought or sold the shares of the target company.

As the target company is treated as a separate legal entity from its shareholders, ownership of any assets, rights and responsibility for liabilities will not usually change after the completion of the share purchase/sale.  However, ownership of liabilities of the target company can be negotiated under the warranties and indemnities included within the Share Purchase Agreement.

Advantages & disadvantages of a share purchase/sale

Examples of advantages for the buyer/seller:

• The transaction structure is often simpler than an asset purchase/sale as the buyer is purchasing a single asset e.g. shares;

• TUPE regulations are unlikely to apply so there will not be any regulations to adhere to as the employees remain contracted to the target company; and

• The seller will have a clean break from the target company.

Examples of disadvantages for the buyer/seller:

• The buyer will purchase the target company subject to all its historic and current liabilities;

• If the buyer wishes to purchase 100% of the issued share capital of the target company or a controlling percentage of the shares, the buyer needs all or a significant number of the target company’s shareholders to agree to sell the shares.

The above are only some of the factors to consider when deciding on an asset purchase/sale or share purchase/sale.  It is important to obtain legal and tax advice as early as possible to ensure you have a clear understanding of the legal structure of the transaction and any tax implications.  If you require advice or further information from our expert corporate lawyers in our business team, please contact us on 01206 217300