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Share sale or asset sale? Which to choose?

If you’re selling your business, and it’s a solvent private limited company, one of the big decisions you need to make is whether to structure your sale as a share sale or an asset sale.


We deal with the legal considerations here, but it’s also worth speaking to an accountant and a business broker to get tax and valuation advice on the structure of your deal. The tax liabilities vary significantly in the different structures, and it could make a surprising impact on your sale proceeds.


Share sale – what’s involved?


A share sale transfers the business to a new owner as an entire package. If you think of your business as a Ferrari, you’re handing over the keys to a new owner, and they assume responsibility for it entirely.


The new owner takes on all the assets of the business, and all the liabilities. This structure is a clean break for the seller. For that reason, and for tax reasons, sellers usually prefer to structure the deal as a share sale.


It’s also good for the continuation of your business. There’s no interruption to your employees, your customers or suppliers. The company will just continue as normal, with a new owner.


On the face of it, a share sale looks fairly straightforward. However, the buyer will be vigilant in finding out as much as they can about your business, so that they are satisfied that the price is right, and that the risks are manageable. As a general rule, a share sale is much riskier for a buyer than an asset sale, because they are taking on all of the liabilities of the business (known and unknown).


In order to get as much transparency as possible on your business, the buyer will conduct an extensive due diligence exercise. This means that you will have to provide copies of all your business documents; employment contracts, supplier contracts, property leases, policies, grievances, any ongoing litigation etc. It can be a very time-consuming and expensive exercise.


If, on review of your supplier contracts, you notice “change of control” provisions, you will have to adhere to those clauses before the sale goes through. Usually that means that you have to tell the supplier of your intention to sell, or sometimes you may need to ask permission.


The other group of people you need to consult is your shareholders. You will need shareholder consent to sell the business, so don’t forget to discuss your plans with them and bring them on the journey with you. They may end up incurring capital gains tax on any profit made during your ownership of the shares.


Finally, the buyer will require you to give extensive warranties and indemnities in the share purchase agreement. These are representations from you about the current state of your business. Given that the buyer is assuming all the liabilities in your business, these ‘promises’ help the buyer to mitigate their risk. It gives the buyer recourse if they later find out that the business isn’t everything the seller said it was when they bought it.


Drafting the share purchase agreement (‘SPA’) and the ancillary documents can be a costly exercise. So while it’s a clean break for the seller, it’s not necessarily more straightforward, or more beneficial financially. It will depend upon the particular business, and the objectives of the seller.


Asset sale – how is it different?


If we return to the Ferrari analogy, an asset sale is akin to a part exchange of the car. The buyer would buy the engine, the seats, the alloys, but might choose to leave the dodgy gear box.


In other words, the buyer can cherry pick which assets and liabilities they want to take on.

This structure is less risky for the buyer, and often has more beneficial tax implications for them, which is why buyers may push for an asset sale over a share sale.


The buyer can choose to buy tangible assets like the plant and machinery, the business premises (if owned by the seller) and your customer contracts. You can also sell the more intangible assets like the intellectual property and the goodwill in the business. After the assets are taken out of the business, the target company is usually dissolved.


Given the lower level of risk involved in an asset sale, both sides are likely to incur less time and money in legal fees. There will be fewer warranties and indemnities to negotiate, which takes away a significant proportion of legal work in a share sale.


However, there will be other legal aspects to consider. Your employees will transfer over to the new owner of the business via Transfer of Undertakings (Protection of Employment) or ‘TUPE’. You will have to follow the process for this, which includes consulting with your employees.


You are likely to have to spend more time consulting with third parties who will be affected by the asset sale. Your contracts with suppliers will need to be renegotiated. And you may have to negotiate with the landlord of your businesses premises.


Conclusion


When you’re choosing how to structure a sale, first set out what you would like to achieve in an ideal world. Think about the level of proceeds you hope to end up with, how you want your employees to be treated, your relationship with suppliers and customers. Working with a business broker, an accountant and a lawyer, we can structure the deal with your objectives in mind.


Of course, it all comes down to negotiation with your buyer, but the pieces of the negotiation are interrelated, and we need to know which points are ‘red lines’ and which points are ‘nice-to-haves’.


If you’re thinking about moving on from your business and you’d like to discuss your options with an experienced M&A lawyer, please get in touch with us at HooperHyde Solicitors.


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