The market for businesses has always been busy, but since the start of the pandemic there has been more movement than ever in terms of businesses changing ownership. Whether you are a business owner looking to sell, an investor or group of investors looking to buy, or even at any other stage in your career, it’s always useful to know how a businesses’ ownership structure influences the process of a transaction.
There are two main ways of buying or selling a business – an Asset Transfer and a Share Transfer, and they each have pros and cons.
In an asset transfer, the buyer can choose the assets they wish to acquire, in a process aptly called “cherry picking” and will not generally assume pre-existing liabilities of the business. Liabilities will normally remain with the seller unless specifically transferred to the buyer in certain cases. Be aware though that cherry picking does not apply to employees of the business.
In a share transfer, ownership of the company transfers from the seller to the buyer, but the underlying business and assets remain owned by the company. The buyer cannot cherry pick the assets and liabilities. The buyer will acquire the shares in the company and will inherit all of the company’s assets and liabilities (including the premises if it is owned by the company) except those which may have been transferred out of the company prior to completion. The buyer will also inherit all pre-existing debts and liabilities of the business.
The most appropriate transfer option is usually dictated by the way the business is owned, which is typically one of the following:
- An individual (sole trader);
- Two or more individuals (partnership); or
- A body corporate (most commonly limited companies).
If you’re looking to buy or sell sole trader and partnership businesses, it’s important to note that the transaction can only be structured as a transfer of assets.
The choice between an asset transfer or a share transfer comes into play where the business is operated by a company. Thus, one of the key considerations for both buyer and seller will be whether to structure the acquisition or sale of the business as a transfer of assets or a transfer of shares.
Given that there is more risk associated with share transfers, the buyer will typically undertake a more detailed process of due diligence, when compared to an asset transfer. This due diligence will seek to identify the historic operation of the business, including its tax history, and in turn may highlight any potential issues. The buyer will also seek a greater degree of protection in the share purchase agreement, with a more extensive set of warranties and indemnities to guard against any issues that have been identified during the disclosure process and any unknown or hidden liabilities.
However, in an asset transfer, the due diligence process is more targeted, relating only to those assets that the buyer intends on acquiring. The asset purchase agreement is also far less complicated, with a more concise set of warranties and indemnities, as any material risks or liabilities that have been identified can be excluded from the sale.
The seller transfers to the buyer the goodwill, premises, fixed assets, stock, employment contracts and other material trading contracts. A number of third parties will typically need to be involved in the sale process to consent to the change in ownership, including third party landlords and where contracts need to be assigned to the buyer, the consent of the other party may also be required. The seller will also need to inform and possibly consult with the employees, or their representatives, prior to completion and there will be various other logistical and practical considerations that will apply where the business changes hands.
Whereas in a share transfer, there is no need to transfer assets or contracts as there is no change in ownership of the business. In addition, third party approvals are not normally required, which often means the transaction can be concluded more quickly than if structured as an asset transfer. Contracts will normally automatically transfer with the company (subject to any change of control provisions) and there will be no change of employer in relation to the employees, thus no formal discussions are required prior to completion.
If the premises are included, in an asset transfer, Stamp Duty Land Tax will be payable by the buyer on both the transfer of property or the grant of a new lease based on a sliding scale rate, assessed on the value of any premises up to 5%, whereas the rate for Stamp Duty on the purchase of shares is much lower, at 0.5%.
There will also be other tax advantages and disadvantages with each approach and this is something on which specific tax advice should be sought at an early stage.
Ultimately, when it comes to buying or selling a business, your personal circumstances need to be taken into account and it’s important to get trusted advice tailored to your situation, be that legal, financial or business related. Our top tip would be that you make sure you get the right guidance as soon as possible, even if you are just in the consideration stage.