When considering the prospect of buying or selling a business, you will have to make the important decision of whether to pursue an asset or share sale. Stereotypically, buyers prefer to opt for an asset sale whilst sellers often favour a share sale. But what are the differences between these two distinct avenues and why should you choose one over the other?
In an asset sale, a buyer will be able to “cherry pick” which assets (and sometimes liabilities too) they wish to acquire. This may be preferable when a buyer is only interested in buying certain parts of a business debt free or if it is acquiring a division of a larger company. “Assets” may include contracts and goodwill of the business, in addition to any physical plant or machinery. In an asset sale, contracts may have to be transferred to the buyer’s name and to do this, the contractors must be made aware of the change of control and in some cases will need to consent to such change. Employees may also need to be TUPE transferred to the new entity and you must ensure the correct process has been followed. An Asset Purchase Agreement will be one of the key documents used to effect the transaction and usually the assets to be sold will be specifically listed in a schedule of the document. Sellers considering whether an asset or share sale is best for them should seek tax advice to ensure that they make the best decision.
Conversely, in a share sale, the buyer acquires the company “warts and all”. The company will continue trading as a legal entity regardless, but its owners (shareholders) will change. All company assets, liabilities and obligations will continue to be owned by the company, whether the new shareholders are aware of them or not. When buying the shares of a company it is possible that some historic liabilities may not come to light until some point in the future (for example tax liabilities) which is why it is vitally important that a full due diligence exercise is carried out. A Share Purchase Agreement will be one of the key documents signed to effect the transaction.
It is advisable for any buyer or seller to seek professional advice as early as possible to establish whether a share or asset sale is best for them. Ultimately, the decision to pursue an asset or a share sale is usually made after taking into consideration all factors, including legal and financial advice.