Share Sale vs Asset Sale: What’s The Best Path When Buying A Business?

Becoming a business owner can be a rewarding experience. Buying an established business rather than setting one up from the ground can be particularly advantageous.

There are, however, two ways to go about this: a share sale or an asset sale. 

What Is A Share Sale? 

A share sale is where a company that has shares has made a decision to sell the entire ownership of that company to the buyer. 

The buyer now becomes the sole shareholder in the company, and acquires all the assets—by consequence of the fact that the Company owns all the assets. 

All the business assets will remain with the company—including its liabilities, which creates some aversion to share sales. 

For example, if a customer of the business was sold a defective product or given negligent advice, then they would have a claim against the company that the new buyer has just taken up. 

The new buyer is now responsible for defending and paying out the claim. 

In some cases, though, the seller may provide the buyer with an indemnity so that the buyer can sue the seller in the event of a historical claim being made. 

In order to mitigate the risks that accompany a share purchase – more often than not – the buyer will have to engage in extensive and detailed due diligence to protect themselves. 

What Is An Asset Sale? 

An asset sale involves the purchase of some or all of the assets owned by a company. 

The buyer will only gain control of the assets that they are purchasing. 

These assets could be anything from equipment and buildings to intellectual property, domain names and goodwill. In this case, the seller will retain ownership of the actual company previously owning those assets. 

In this scenario, no liabilities are generally transferred across, other than those specifically defined as a “Sale Asset” in the contract of sale. 

However, from a buyer’s perspective, there may be more effort, cost and risk involved in transferring all of the contracts and client lists out of one entity and into another as part of an asset sale. 

Share Sales vs Asset Sales: Which One Should I Choose? 

When determining whether a share sale or an asset sale is right for you, there are several factors you should consider. We’ve outlined some of these below. 

Liabilities 

Share Sale: The liabilities of the company will generally transfer to the new buyer (it can even be a historical tax non-compliance!). To protect themselves in these situations, buyers often require sellers and their directors to indemnify the buyer against such claims and losses that may arise in the future.

Asset Sale: Unless the buyer has expressly assumed any liabilities in the contract in relation to particular assets, liabilities generally are not inherited by the buyer. 

Transactions 

Share Sale: As the entire company is moving, it can be a lot easier to transact. You don’t have to re-sign any contracts with clients, service providers or even employees as the entity remains the same. Having said that, if  there are “Change of Control” clauses in contracts entered into by the company, you may need to get consents of counterparties (e.g. a landlord of a lease) to go ahead with the sale. 

Asset Sale: When you’re purchasing just the assets of a business, you will need to get your clients, suppliers and employees to sign new contracts to be bound with your new entity. In some cases, it may be that third parties need to agree to the buyer’s taking the agreement (commonly in Supply Agreements).  

IP Assets 

Share Sale: As the entity that owns the IP Asset remains the same, no further action needs to be done to transfer ownership. If you’re a buyer, just make sure that the company actually owns all the IP it says it does!

Asset Sale: As assets such as trade marks and patents are registered with the Intellectual Property Office (IPO), when you’ve purchased this asset, the government body will have to be notified of the transfer in ownership. You’ll also need to make sure all IP assets that are part of the sale are properly defined in the contract of sale

Stamp Duty

Stamp Duty is a tax that governments impose on the sale of assets.

It is usually the buyer who pays the stamp duty, so the amount may end up adding up!

In a share sale, the stamp duty sits at 0.5% of the sale price. If you buy shares electronically, then Stamp Duty Reserve Tax (SDRT) applies.

In an asset sale, however, tax may no longer be payable. This is because things like IP no longer require stamp duty tax when being transferred.

Key Takeaways

Deciding between a share sale and an asset sale can be a difficult decision—particularly with a range of factors to consider such as tax considerations or potential liabilities. It is important to do your due diligence before purchasing the business. 

Whether you’re purchasing a company with multiple vehicles and stock, or an online business with a trade mark and domain, we’re here to help!  

Depending on which avenue you decide to take, we can help from conducting due diligence to completing the legal documentation.

Feel free to get in touch with us at [email protected] or on 08081347754 for a free, no-obligations chat.

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