When preparing for the sale of your business or acquiring a new business, one of the earliest points to consider after agreeing the price is how the transaction will be structured.
There are two basic structures that a corporate transaction can take, and each of the parties will have their own view as to which is more appropriate for their deal.
The two options are a share sale and an asset sale (sometimes also known as a business sale). On a share sale, the shareholders in the target company sell their shares to the buyer, who acquires the company complete with all of its assets and liabilities. An asset sale, by contrast, is where the buyer cherry picks the various assets which comprise the target business from the company which owns them.
The tax treatment and allocation of risk between the seller and the buyer can be very different depending on the structure chosen and the individual features of a particular transaction, but there are some considerations which apply generally.
Asset sale
An asset sale offers the following advantages:
- it offers the flexibility to acquire only certain assets, and to leave unwanted liabilities with the seller. This may be beneficial to a buyer who is acquiring a business which is fundamentally profitable, but suffers from particular issue. It can also allow a diversified business to sell one particular part of its trade.
- If the seller is selling any capital assets at a loss, it may be entitled to set that loss against other chargeable gains and reduce its tax liability.
- The buyer may be entitled to claim capital allowances in respect of certain assets which it acquires.
There are some disadvantages to an asset sale:
- an asset sale can be more complex. The parties need to identify exactly which assets are to be bought and sold, which is not always straight forward. There are often practical complexities with effecting the actual transfer of assets, such as ensuring customers and suppliers deal with the buyer following completion. Certain assets, such as property, will require particular formalities to transfer legal title.
- Assets sales may not be tax efficient for the shareholders of the seller. The selling company may pay tax on the proceeds of sale, but the shareholders may pay tax on that money again when they extract it.
Share sale
The main advantage of a share sale is that it is generally more straightforward from a structural perspective. The selling shareholders simply transfer their shares to the buyer in exchange for the payment of the purchase price. For that reason, the "clean break" a share sale offers is often attractive to sellers. Because the sellers are receiving the purchase price directly, it avoids the double tax charge which an asset sale may incur. The availability of entrepreneur's relief for many sellers of shares makes the share sale especially favourable for sellers.
From a buyer's perspective, the key disadvantage of a share purchase is that the company being bought is acquired "warts and all". All assets and liabilities remain in the company, so it is typical for a buyer to carry out more thorough due diligence process on a share transaction. A buyer will typically seek more extensive warranties from the sellers than it might on an asset transaction as a result of the additional risk.
If you would like advice on selling or acquiring a business, please do not hesitate to contact any of the highly experienced lawyers in our corporate department.
Contact us
For more information on anything covered in this article, please contact a member of our Company and Commercial Law team by email at info@ramsdens.co.uk or call 01484 821 500.