When buying or selling a business, the structure of the transaction can have a significant impact on the benefits accruing to the sellers and the risks taken on by the buyers. Here we consider a fundamental component of any transaction where the target is a limited company, that is, whether the transaction is structured as a share sale or an asset sale.

What is the difference between a share sale and an asset sale?

The key distinction is in what the purchaser is acquiring; this can be the share capital of the target company or the assets of the target. Each approach presents different challenges and benefits to buyer and seller.

Share sale– where the transaction is structured as a share sale, the shareholders of the target sell their shares to the purchaser.

Asset sale – Where an asset sale is agreed upon, the purchaser will acquire only the assets of the business that are subject to sale. This may include property, machinery, stock, contractual rights, patents and trademarks and other intangible or tangible assets.

Issues to Consider

There are a multitude of issues to consider when structuring a deal, depending on the specifics of the transaction. Some of the more pertinent issues are likely to be:

  • Tax implications for the seller: There can be significant tax disadvantages for a seller under the asset sale model, primarily due to taxable gains often arising twice, initially in the company upon sale of the assets and again when funds are distributed to shareholders.
  • Risks for the acquirer: In the event of a share sale, the acquirer purchases all assets and liabilities of the company, some of which may be contingent in their nature or difficult to detect in due diligence. While the buyers can seek indemnities from the sellers these can be of limited value.
  • Due diligence process: Due diligence for a buyer is likely to be more straightforward and less time consuming as part of an asset purchase. Fewer investigations will be required and liabilities will typically remain with the seller upon transfer of the assets. This can make an asset sale more straight forward to transact.
  • Continuity for customers and employees: As share sale is likely to be more straightforward in terms of retaining customers and employees, to the extent that a transaction could take place with no meaningful impact on either. In the event of an asset sale, employees may be transferred to a new employer, and customers will likely be buying from a new supplier, which can throw up several issues.
  • Legacy liabilities for seller: In the event of an asset sale, the directors, shareholders, and guarantors may be left with personal liabilities (personal guarantees for example) and may carry the risk of contingent or unknown liabilities. These issues will need to be dealt with via an appropriate process if the seller is ceasing to trade and may add an additional layer of cost.

Ultimately every transaction has its own unique set of circumstances for each side, which tend to lead to one option being chosen over the other. Sellers will have the ability to shape this to a certain extent by offering either shares or specific assets in a sales process, however there may be circumstances where a buyer has a strong preference for an alternative approach and this can be a sticking point in the sales process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.