Share Sale v Asset Sale: What to consider
There are two principal methods of acquiring an incorporated business in the UK: a share sale or an asset sale. Both ways achieve broadly the same commercial objective, but it is important to choose the right method for your deal. Each method has fundamental differences in the legal effect and the tax treatment. We always advise our clients to seek tax advice from an accountant or a tax specialist as we do not advise on tax. This article sets out the key differences, advantages and disadvantages of each method.
What is a Share Sale?
A share sale involves the Buyer acquiring a majority, or all the shares in the company. In essence, the shares are the asset that is being acquired. The deal is between the company’s shareholders and the Buyer. A Buyer acquires all the assets, liabilities and obligation of the company, the good the bad and the ugly. Certain protections may of course be negotiated in the Share Purchase Agreement (SPA), however, the starting point is that everything pertaining to the company is acquired.
Advantages
- It is considered a more simple transaction as the target company is transferred as a whole
- Business continuity will be maintained in the company contracts, the company’s employees, the company’s licenses, and the company’s relationships
- It is often more tax-efficient from the Seller’s perspective
- There is a possible clean exit for the Seller
Disadvantages
- The Buyer inherits all liabilities, those being past, present and future
- Extensive due diligence is required
- The deal may cause issues with key contracts or financing agreements
- Complex warranties and / or indemnities may need to be given in the SPA by the Buyer to cover potential risks the Seller may inherit
What is an Asset Sale?
An asset sale involves the Buyer acquiring a collection of assets and rights, and sometimes assuming responsibility for certain liabilities, relating to the target business.
What the Buyer acquires is to be negotiated, but items that are the most commonly acquired as part of an asset purchase transaction are:
- Business
- Goodwill
- Information technology and IT systems
- Intellectual property rights
- Plant and machinery
- Premises
- Stock
- The benefit of business contracts
Advantages
- The Buyer can ‘cherry-pick’ which assets and liabilities to acquire
- The Buyer has a reduced risk of inheriting hidden or historical liabilities
- There is considered greater flexibility in structuring the deal
- The Seller may retain non-core assets or liabilities they wish to keep
Disadvantages
- It is a more complex transfer process (each asset, contract, employee may need individual transfer or consent)
- Can be disruptive to operations, employees, and customers
- It is potentially less tax-efficient
- May possibly involve higher administrative costs
It is important to consider which method will be the most suitable based on the relative advantages and disadvantages. It is equally important to note that every deal is different, and therefore a general assessment of all the relevant factors should be conducted.
If you wish to discuss any of the above, please contact our Corporate and Commercial team below or call us on 01702 338338.
