Buying or selling a business is a process and as with all processes, the key to success is understanding the steps involved. Whether you are a buyer or a seller, one of the key decisions you will be required to make is whether the sale or purchase will be an asset or a share sale but what is the difference?
If the business is operated by the existing owner as a sole trader then there won’t be a choice and the sale will always be an asset sale, where the seller (sole trader) will be selling the assets and the goodwill of the business as a going concern.
If, however, the business is operated by a limited liability company (as the vast majority of businesses are) then the parties would have a choice of either a share or an asset sale. As mentioned, an asset sale is where the seller sells some, but not always necessarily all, of the individual assets which make up the business. In contrast, a share sale is where instead of selling individual assets, the shares of the company which operates the business are sold – so it is the shareholders of the limited company who change and not the company that is operating the business.
So what’s best? Well, there is no such thing, as it will always depend on individual circumstances as to what might work better. Below are a number of points to consider but please note that the list is not exclusive!
Debts/Liabilities
In an asset sale, the seller and the buyer can agree which assets will be included and which will be excluded from the sale. This typically makes an asset purchase attractive to buyers because they can pick the assets they want and leave the assets that they don’t want with the seller, including any debts or liabilities. In comparison, on a share sale a buyer cannot pick and choose because they are buying the company as a whole with all of its history from the beginning of time.
Contracts
On an asset sale each individual contract will need to be transferred from the seller to the buyer. In case of supplier contracts, this means contacting each supplier and asking them to transfer the contract to the buyer or, alternatively, the contract with the seller would be terminated and the buyer would enter into a new contract directly with the supplier. If these are contracts with customers, then it will be a case of writing to customers advising them that their contract has been transferred to a new entity (the buyer) and that going forward the services will be provided by the buyer (and, of course, the need to ensure that customers update payment details). If there are a large number of contracts and contracts are an essential part of the business and/or if the contracts require consent of a third party before they can be transferred then an asset sale may be unattractive. Instead a share sale may be the preferred option because the contracts would remain with the company making it easier for customers.
Property
If the business is operated from commercial premises then on an asset sale there are two options. Either the existing lease is terminated and the buyer is granted a new lease or he existing lease is assigned. Either way, there will be a need to involve the landlord and this may add time and cost to the process! The advantage of a share sale is that, as long as the lease is in the name of the company which is being sold and there are no guarantor provisions, then the lease will simply stay with the company and there will be no need to involve the landlord.
Employees
Similarly, on a share sale, employees are largely unaffected. Their employer does not change. On an asset sale however, employees are protected by TUPE – a piece of legislation which protects employees’ rights – it means that the buyer has to honour employees’ terms and conditions of employment, there are strict rules around termination of employment and a requirement to consult with employees in advance of the sale.
Funding
Having raised points 1-4 the choice may actually be out of the hands of the buyer and seller as sometimes the decision may be driven by the funder. Depending on the size of the transaction, funding may be conditional on the sale being an asset sale for example, so it is always worth checking this with the bank or funding institution first before you get much further down the line.
In addition to the above, there is of course the question of tax! Tax implications will be very different for the buyer and the seller depending on whether it is an asset or share sale. You should therefore seek tax advice from a qualified accountant before making a decision. If you are a buyer, one point worth remembering is that on a share sale, there is additional tax payable by way of stamp duty – this needs to be taken into account when negotiating purchase price and raising finance.
If in doubt, speak to your solicitor and accountant!
