What is the difference between an asset sale and share sale?
26 March 2019 by Andreea Brindas
Are you thinking about selling a business, but you are unsure what your options are? This blog will explain the differences between a share sale and a business sale (also known as an asset sale). This blog will also include the advantages and disadvantages for the seller and buyer respectively.
Sellers who wish to sell the whole of their company will normally seek a share sale. It is important to understand that an incorporated company is a separate legal entity; which means it can hold assets and liabilities in its own name. Therefore, by selling the company, you sell all of the business and assets it holds and owns.
The seller/sellers, in their capacity as shareholders of the company, sell their shares, normally consisting of the whole issued share capital of the company, to the buyer. In theory, the seller sells control of the company to the buyer and the company retains all assets and liabilities in its name as a body corporate. In practice, the business being sold (known as target) becomes a fully owned subsidiary of the seller. Therefore, nothing changes in terms of the company or any matters in its name, only the ownership of the company itself.
This type of sale is less attractive for a buyer because of the extensive due diligence required; this is due to the buyer acquiring both assets and liabilities of the company. For more information in relation to the ‘buyer beware’ principle please refer to our previous blog at: https://www.fjg.co.uk/blog/2019/03/25/what-to-look-out-for-when-you-are-buying-a-business.
An asset sale is a sale of a business; which can be the whole of a business as a going concern. This allows the buyer to ‘cherry pick’ the assets it wants to acquire from the business; for example, individual assets and goodwill.
In an asset sale where the transfer is one of a going concern, the employees will transfer automatically to the buyer under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). This means that the employees will transfer under their current terms of employment; employees period of continuous employment will also be preserved.
In relation to the liabilities, a buyer will automatically assume the liabilities of the seller that it agrees to; such as those in relation to the employees. The seller may wish negotiate with the buyer that the buyer will effectively assume some of the other liabilities. Other liabilities may include those in relation to creditors or book debts for example. Notwithstanding the above, the majority of the pre-completion liabilities will remain with the seller and therefore a buyer may prefer an asset sale over a share sale.
Moreover, as the buyer is acquiring assets only, there will be less due diligence to be carried out; which means the transaction may be more time and costs efficient.
It is important to note that a share sale is only open to incorporated companies with a share capital. Whereas an asset sale is open to sole traders, partnerships, limited liability partnerships and incorporated companies.
Tax issues may arise in both asset and share sales from both the buyer and the seller’s respective perspective.
The accountant of the business/company would be best placed to advise on the most tax-efficient structure of any proposed sale or acquisition. We therefore recommend that you seek independent financial advice from an expert account.
Our Corporate Commercial Department here at Fisher Jones Greenwood LLP can guide you through the transaction and assist you with the preparation of any relevant documents. Should you require any further information or assistance please do not hesitate to get in touch – call 01206 700113 or email [email protected].