One of the key issues to consider at the start of a business sale is whether the assets of the business, or all the shares in the company will be sold. These two methods may have significant implications for each of the Seller and the Buyer and should be considered by both parties when structuring the transaction.
Asset sale or share sale?
If the business is run by a sole trader or a partnership then there will be no shares to buy. The assets, including contracts and goodwill of the business, will be sold in an asset sale. However, if the business is a limited company, then the Buyer can choose whether to buy the assets or the whole of the company itself.
Broadly speaking, a Buyer will normally prefer an asset sale, and Seller will normally prefer a share sale. The following article will explain a few of the reasons why.
Under an asset sale, the Buyer acquires some or all of the assets owned by the Seller. The Buyer will generally prefer to buy the assets of a company, as this will enable them to cherry pick exactly which assets they are buying and identify precisely those liabilities they wish to take over, giving the Buyer a great degree of flexibility. The Seller’s business name may or may not be included in the sale and the licences and contracts may or may not be transferred to the Buyer,depending on the terms agreed. All other liabilities will be left with the Seller, meaning that the Buyer does not have to take over liabilities that they wish to avoid. The Buyer therefore potentially takes on less risk.
One asset that cannot be cherry picked by the Buyer in an asset sale is the existing employees of the business. All employees automatically transfer on their existing terms and become the responsibility of the Buyer who must consult with the employees prior to completion.
If an asset sale involves property or land then the Buyer will be faced with paying Stamp Duty Land Tax at a rate of anything up to 4% of the price attributed to that particular asset. If the asset sale is deemed as a transfer of a going concern, then it is deemed to be outside the scope of VAT. The Buyer may be able to claim Capital Allowances for the price paid for equipment and industrial buildings.
Under a share sale, the Seller is the individual shareholders of the company. The Buyer acquires all the shares in the company and indirectly obtains ownership of all assets and all liabilities.
The Buyer steps into the shoes of the Seller as shareholder. The contracts and assets remain in the company’s ownership. There is therefore no need for the assets of the company to be transferred and this means a share sale can often be completed without any third-party involvement making it far more discreet. When a Seller sells shares in a company they achieve a complete break in the relationship between themselves as shareholders and the company. Assuming the Seller has not given personal guarantees, they will not have liability for the debts of the business following completion as they will remain with the Company. As the Buyer indirectly assumes all of the of the company liabilities(whether known or unknown),they are generally at greater risk in a share sale.
The Buyer in a share sale is not restricted with how they can deal with employees in the same way that they are under an asset sale. They can potentially change terms of employment and take other measures if they are necessary
Tax wise in a share sale, a Buyer must pay stamp duty of ½ % of the price paid for the shares. Share purchases are entirely exempt from VAT. A Seller is likely to prefer a share sale as the tax implications are generally more favourable than an asset sale,as they may be entitled to a relief of 50% on the Capital Gains Tax payable on the sale of the shares.
Whether the transaction is structured as an asset sale or a share sale, it is essential to obtain independent legal, tax and accounting advice so that the parties understand the implications of the transaction. For specialist legal advice, contact Luke Rees or a member of the Commercial Department at Fidler & Pepper on 01623 451111.