In the sale or purchase of a business, a very important consideration is whether the buyer should purchase the:
Shares of the Company comprising the business; or
Assets of the Business directly from the company itself.
This article is focused on the sale and purchase of a business which is operated by a company. For other business structures such as a sole trader or partnership, the buyer is usually only able to purchase the assets of that business.
The Difference Between an Asset Sale and a Share Sale
An asset sale involves the purchase of some or all of the assets owned by a company. Examples of common assets which are sold include; plant and equipment, land, buildings, machinery, stock, goodwill, contracts, records and intellectual property (including domain names and trademarks). The transaction is between the company and the buyer of the business assets. The seller retains ownership of the company structure.
In a share sale, the buyer purchases shares in the company, rather than just the assets. The buyer purchases the company – a separate legal entity. Typically, the company continues to retain its assets and liabilities. The transaction is between the company’s shareholders and the buyer of the shares. All business assets remain with the company. It is the composition of the ownership of the company that changes.
Advantages and Disadvantages of an Asset Sale
Typically, a seller provides fewer warranties and indemnities in an asset sale.
The seller can exclude any assets that are not intended to be transferred.
Transferring individual contracts and assets from the seller to the buyer may require the consent of third parties and/or additional registration which can be a time consuming and onerous process. For example, suppliers of the business may have to consent to the buyer taking over supply agreements and the landlord under a lease would have to consent to the lease being assigned to the buyer.
The seller must procure releases of any security interests affecting the assets of the business from their financiers prior to the completion date.
The liabilities of the business generally remain with the seller.
Usually, the liabilities remain with the seller company and do not transfer to the buyer.
The buyer can ‘cherry pick’ certain assets and leave any unwanted assets with the seller. The buyer may agree to take on certain liabilities of the business. For example, if employees are transferred across from the seller company to the buyer’s business as part of the transaction, then a buyer may agree to take on the accrued employee entitlements subject to a reduction in the purchase price for the assets.
Subject to certain criteria, the sale may be classified as the sale of a ‘going concern’ which may result in no GST being payable on the transaction.
Stamp duty may be payable on the transfer of land and other real property.
Third parties may refuse to consent to assign or novate contracts which the buyer considers to be vital to their decision to purchase the business.
The seller will often require the buyer to offer employment contracts to all current employees which are substantially similar to their current terms.
Some assets, such as government licences and permits, may not be assignable.
Advantages and disadvantages of a share sale
There may be a better overall return for the shareholder in a share sale transaction which includes access to tax concessions.
Client, supplier and employment contracts remain within the company. There is less effort and risk associated with ensuring clients, suppliers and employees will stay with the company than in an asset sale.
Because the company retains all historical, actual and contingent liabilities of the business, to protect against these liabilities, the seller may be required to provide extensive warranties and indemnities. These warranties (unless limited) could be required for a significant period of time. The directors of the selling company may be required to provide personal guarantees which may expose them to unlimited personal liability.
Part of the purchase price may need to be held on trust or the seller may need to provide a bank guarantee as security if there is a breach of a warranty.
The seller may need to comply with any restrictions on share transfers to third parties, such as pre-emptive rights provisions in the company’s constitution or the Shareholders Agreement.
Where the company has recognised brand, goodwill and reputation, it may be preferable to buy the business by way of a share sale in order to capitalise on the company’s brand, goodwill and reputation.
As contracts, business names, leases and intellectual property are already in the name of the company, there is no need to formally assign contracts and other property and therefore third party consents are not required.
Stamp duty is not payable in a share sale (unless the selling company is ‘land rich’).
The buyer becomes the sole shareholder in the company. The company retains all past, current, future and contingent liabilities of the business on completion (including any tax liabilities of the company).
Even if the seller provides an indemnity for the liabilities incurred by the company up until the date of completion, unless an amount representing the value of the indemnities/ warranties is held on trust as security or a bank guarantee is procured, there is the risk that the seller may not have the funds to indemnify the buyer when called upon to do so.
To mitigate the additional risks associated with a share purchase the buyer usually must engage in extensive and detailed due diligence to detect liabilities and risks associated with the selling company.
Some agreements require third party consent where there is a ‘change in control’ of the company.
Deciding how to sell your business
Although there are advantages and disadvantages for buyers and sellers associated with a share sale and asset sale transaction, there are ways to mitigate risks that are associated with each type of transaction.
It’s important to understand the commercial, taxation and legal risks associated with both types of transactions to select the most suitable type of transaction for the particular sale.
NOTE: This article has been provided by the Page Seager Legal Team