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Selling a Company: Asset sale or share sale?

Assets or Shares?

Assets or Shares?

This article explains the main differences between selling a company as an asset sale or a share sale, and the implications of the different structures for both the buyer and the seller.

There are two main ways a buyer can acquire a business.  A share purchase involves buying the shares of the company, and as a consequence ownership of the assets inside the company.  In an asset purchase only the assets are bought, leaving the seller with the legal structure of the company.  Each method has its advantages and disadvantages.
 
THE MAIN ISSUES WHEN SELLING A COMPANY BY SHARE SALE

At first sight a share sale seems more straightforward than an asset sale.  In reality it can be much more complex requiring detailed due diligence, and legal protections from past actions of the company.  A share sale has the following advantages and disadvantages:

    Skeletons in the cupboard – the buyer becomes responsible for all of the target company’s liabilities and responsibilities, some of which might not be found in due diligence;

    Minimal disruption to business– although ownership has changed the company will carry on in business with the same name, legal identity and trading conditions;

    Contracts – most contracts to which the company is a party will continue after the acquisition (see change of control below);

    Employment – Staff will continue to be employed by the company and there will normally be no need for TUPE consultations;

    Property – As there will be no change in ownership of any land or property owned by the company there is no need to register any transfer at the Land Registry, or to pay any Stamp Duty. If the property is leased the lease will have to be reassigned which will involve costs for legal fees and Stamp Duty;

    Change of control clauses – Some contracts do have “change of control” clauses which give the other party the right to terminate a contract if the shareholders change.  All contracts must be checked in due diligence for this type of clause;

    Entrepreneurs Relief – Most UK share sales will be taxed at 10% of the capital gain during the period the seller has owned the shares by exercising Entrepreneurs Relief on the Capital Gains Tax due (Consult your accountant to make sure the relief is available to you before accepting an offer);

    Stamp Duty – any transfer of shares for more than £1,000 will attract Stamp Duty at 0.5%;

    VAT –  A share sale is exempt from VAT;

    Continuing seller obligations – The seller will usually want to be released from any ongoing liabilities of the business after the sale. The buyer will expect commitments by the seller in the sale contract to pay unpaid taxes and any other claims arising from the sellers ownership of the company. This process of sharing the risks is the most contentious area in the whole sale process.

Sellers in general tend to prefer share sales in most circumstances because they can minimise taxes by exercising Entrepreneurs Relief. Buyers in general only when they want to maintain existing contracts or credit arrangements. Because share sales need extensive due diligence to make sure there are no unexpected problems, and the buyers require contractual protection from the seller, transaction costs for a share sale tend to be higher than for an asset sale.
 
THE MAIN ISSUES WHEN SELLING A COMPANY BY ASSET SALE

Asset sales are favoured by buyers as they are able to limit liabilities to the specific assets they acquire. An asset sale is the only option available if assets are bought from a sole trader or partnership as there will be no shares.  An assets sale has the following advantages and disadvantages:

    Buyer choice – the buyer can pick and choose which assets or parts of the business they want to buy;

    TUPE – the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) mean that any employees engaged in the business automatically transfer to the buyer on their existing terms and conditions.  Failure to follow the TUPE requirements is almost certain to lead to claims for unfair dismissal;

    Transferring contracts – suppliers or customers will often have to agree to transfer existing contracts to the new owner of the business.  This can be a time consuming process in the first few weeks of ownership;

    Property – If the buyer needs leasehold property used by the business the consent of the Landlord, and probably the transfer of the lease, will be required before that can happen;

    Capital Gains and Corporation Taxes – A limited company will pay at least 20% Corporation Tax on the goodwill portion of the selling price in an asset sale, and the shareholders a further 10% Capital Gains Tax after Enterpreneurs Relief when the limited company is wound up to extract the cash received on the sale.

    Stamp Duty – if land and buildings are bought Stamp Duty Land Tax of up to 4% will have to be paid by the buyer;

    VAT – No VAT will be payable if the asset sale is a transfer of a business as a going concern. If the assets purchased cannot be seen as a going concern VAT will have to be paid.

Buyers in general prefer asset sales where there are no important existing contracts to be preserved.  If there are any liabilities in the company that the buyer is unwilling to assume an assets sale will be the only viable option.

 

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

 
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One comment on “Selling a Company: Asset sale or share sale?

  1. Pingback: Selling a Private Company: Practicalities of a Share Sale | Select Business Sales

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