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| 19 August 2019

ACQUISITION STRUCTURES: ASSET OR SHARES?

Not sure of the difference? Or which option would better suit your requirements or situation? It is important when you are considering buying or selling a business that you first consider how you intend to structure the transaction.

When considering either buying or selling a business, one of the first considerations that needs to be made is the structure of the transaction. There are two options for structuring a business acquisition, these are as follows:-

  • Asset
    • In an Asset transaction the Buyer acquires the assets which make up the business and the goodwill of the business.
  • Share
    • In a Share transaction the buyer acquires all of the shares in the company which carries on the business being purchased.

WHAT TO CONSIDER

When determining which option best suits your requirements, there are several factors that need to be taken into account, such as:-

  • What are the Tax Implications?
    • The structure of buying or selling a business often has tax implications which will be dependent upon your personal circumstances. Whilst we are tax aware, we are not tax experts, and one of the first steps that you will need to take is to liaise with an accountant in order to determine how the structure of the transaction may impact your personal circumstances.
  • How is the business being operated?
    • If the business is being operated by a company, you will have the option to choose whether to structure your sale or purchase by way of either an asset or share transaction. However, if the business is being operated by a sole trader or a partnership, you will not be able to structure the transaction by way of a share sale or acquisition and will only be able to acquire the business by way of an asset transaction.
  • Is the business owned by a party in liquidation or bankruptcy proceedings?
    • If the business is being operated by a company which is experiencing financial difficulties, parties often have little choice other than to proceed by way of an asset transaction in order to limit the liability of the Buyer and also by reducing the debt that will be acquired by the Buyer whilst obtaining as much as possible for the assets of the business. In these types of transactions there may be limited information available regarding the business and its operation because the Seller may be a liquidator or administrator and not the original owner.
  • What liability do you want to sell/assume responsibility for?
    • When buying or selling a company one of the main considerations will be to consider the level of liability that you wish to part with or are willing to assume. It is arguable that the level of liability being assumed under an Asset acquisition or sale is less than in a Share acquisition or sale, however, this very much comes down to the drafting of the key documentation.

Please find some of the main pros and cons of each acquisition structure below:-

ASSET ACQUISITION – PROS

  • Selective
    • When acquiring a business by way of an asset transaction, both the Seller and the Buyer can choose which assets of the business to sell or buy. This therefore offers both parties with greater control and an opportunity to negotiate what the transaction will comprise.
  • Liability
    • As the parties are able to negotiate what the transaction will comprise of, this also means that the liability being transferred will also be able to be determined by means of selecting what assets will form part of the transaction. Liability is often linked to specific assets, including contracts, and the parties may therefore negotiate what assets/liabilities will be included and excluded.
  • Apportionment of Purchase Price
    • The purchase price will be apportioned between each asset, thus, subject to accounts advice, affording both parties with an opportunity to structure the transaction in a way which is most tax efficient and beneficial for their specific needs. It is always highly recommended that prior to determining the apportionment of the purchase price that an accountant is consulted.

ASSET ACQUISITION – CONS

  • More Complex
    • An Asset acquisition is comprised of the transfer of each individual asset and can therefore become more cumbersome for both parties as the title to each individual asset will need to be transferred. This could include dealing with the transfer of property, contracts and all other assets to ensure that ownership of such assets vests in the buyer from completion.
  • TUPE (The Transfer of Undertakings (Protection of Employment) Regulations 2006)
    • Whilst many individuals believe that by proceeding by way of an Asset acquisition means that they will not be required to assume responsibility of the employees of the business, this is not always true. TUPE may apply meaning that the buyer will be required to take on the employees on the same terms as they were employed before. Whether or not TUPE applies will need to be determined on a case by case basis.
  • Apportionment of Purchase Price
    • Whilst the apportionment of the purchase price can be a benefit to parties in this type of transaction, it can also carry other consequences. By way of an example, if a property is being acquired as part of the transaction it will need to be transferred from the Seller to the Buyer thus potentially attracting a Stamp Duty Land Tax payment. It is therefore imperative that you consider what assets are being acquired or sold from the outset in order to determine the most beneficial way for a transaction to be structured so that you may limit any potential tax liability.

SHARE ACQUISITION – PROS

  • Simpler
    • It is arguable that a Share acquisition is simpler in terms of its structure as instead of the assets of the business being transferred and reformed, the company who owns and operates the business is the only asset which is transferred. Whilst this will therefore mean that the buyer will need to carry out more thorough due diligence, this is more simple in terms of what is actually being transferred, being the shares of the operating company.
  • Continuity
    • As it is only the company which operates and controls the business that is being sold the business will continue to operate as it did before the transfer of shares. This therefore provides continuity of business as to the ‘outside world’ nothing would have changed.
  • Transfer of Assets
    • As the business itself will technically not be changing hands, there will be no need for any assets to be transferred as they will continue to be owned and controlled by the operating company, and it will be this company that a buyer acquires.
  • Contracts
    • The transfer of the business assets will also mean that any contracts which are in the name of the company should not need to be transferred, however, some contracts contain a change of power provisions and it is therefore prudent to check the same in order to determine whether any notices need to be served following completion of the sale and acquisition.
  • Employees
    • Employees of the business that are employed by the company will not need to be transferred as technically their employer will not change. The company will continue to operate the business both before and after completion and the employment contracts and the employees’ rights will therefore remain unaffected.

SHARE ACQUISITION – CONS

  • ‘Warts and All’
    • One disadvantage for a potential Buyer is that by buying all of the shares in a company, you will also assume the liability of that company. It is therefore important that thorough due diligence is carried out and sufficient warranties are included in the Share Purchase Agreement to ensure that you are offered sufficient recourse in the event of a potential claim. It may be possible for some assets to be transferred out of a company prior to completion of a share transaction, although this may not be a cost effective method of dealing with a matter and an asset transaction may therefore be more suitable if there are specific liabilities or assets which are of a concern.
  • Due Diligence
    • As mentioned above, as a result of the all-consuming nature of a Transaction, it is important that any potential buyer carries out extensive due diligence of the target company prior to committing to the transaction. This may prove to be costly in that all aspects of the company will need to be reviewed, however, in the absence of such due diligence it may be difficult for a Buyer to determine the liabilities that they are potentially assuming.
  • Stamp Duty
    • Please note that stamp duty is also chargeable on shares. Stamp Duty is often perceived as a tax on property matters, however, this is in fact a separate tax called Stamp Duty Land Tax. It is therefore important to consider and calculate your tax liability prior to determining the most beneficial structure for your specific transaction.

OVERVIEW

The decision to proceed by way of an Asset or Share acquisition or sale will be specific to each individual circumstance. It is therefore essential that careful consideration is given at the outset of a transaction to determine the most beneficial and cost effective route for each party.

The above basic information provides a brief overview of the options to structuring your business sale or acquisition, however, this decision is often on a case by case basis. If you are looking to either sell or buy a business our specialist team of Commercial Solicitors can provide you with the assistance you require.

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