An asset sale and a share sale are two common methods used in buying or selling a business, each with its own implications and consequences. The main difference lies in what is being sold and how the transaction is structured.
In essence, an asset sale offers the buyer greater control by allowing the selection of specific assets and liabilities, while a share sale involves acquiring the whole company, including all its assets and liabilities, which might be simpler but riskier.
Buying or selling a business is likely to be one of the most significant transactions of your life, and it’s essential to ensure you’re getting the best advice
Let’s delve into the details:
What is an asset sale?
In an asset sale, the buyer purchases specific assets and liabilities of the target company. These assets can include physical property, equipment, inventory, intellectual property, customer lists, contracts, and goodwill, among others.
Liabilities such as debts, pending lawsuits, and other obligations may or may not be assumed by the buyer, depending on the negotiation.
Advantages of an asset sale
Reduced liability: The buyer can choose which liabilities to assume, limiting potential risks.
Step-up in basis: The buyer can revalue the assets at the purchase price, potentially reducing future tax liabilities.
Selectivity: The buyer can cherry-pick desirable assets while leaving behind unwanted items or liabilities.
Disadvantages of an asset sale
More complex: Since individual assets need to be transferred, the transaction can be more time-consuming and require more paperwork.
Consents and assignments: Some contracts or agreements may require specific consents or approvals for the transfer of assets.
Potential opposition: Employees may not be in favour of an asset sale as it can lead to uncertainty and possible job terminations.
What is a share sale?
In a share sale, the buyer acquires the ownership (shares) of the target company directly from its existing shareholders. This means the buyer purchases the entire company, including all its assets, liabilities, contracts, and obligations, as well as any potential legal and tax liabilities associated with the company.
Advantages of a share sale
Simplicity: A share sale involves transferring ownership of the entire company, making the process more straightforward.
Continuity: Contracts and agreements remain in place, which can provide stability for employees, suppliers, and customers.
Tax benefits: There may be favourable tax treatment for the seller or the buyer in a share sale.
Disadvantages of a share sale
Increased liability: The buyer takes over the company with all its existing liabilities, known or unknown.
Potential hidden issues: The buyer inherits any legal, financial, or operational problems the company might have.
Price considerations: Share prices may be higher due to the inclusion of intangible assets like goodwill.
Questions to ask yourself before selling your business
• Do you know which parts of your business (like property or customer lists) are part of the deal? Are there things you want to keep after you sell?
• Do you know what your business is worth? (use the Rubric business valuation calculator here to find out!)
• Is everything in your business organised, up-to-date, and in working order including property and stock?
• Have you paid all your bank loans and taxes?
• Have you thought about your tax liability on completion of the sale?
What legal support do I need with an asset or share sale?
Due diligence: Dealing with the due diligence process. This includes organising and reviewing all documents related to the transaction.
Contract preparation: Drafting the sale and purchase agreement, which outlines the terms of the sale, including the purchase price.
Compliance: Ensuring the sale complies with relevant laws and regulations, which may include tax laws, employment laws (like TUPE regulations), and industry-specific laws.
Closing the transaction: Managing the completion process, which includes executing the transaction documents and receiving the purchase price.
Warranties and indemnities: Negotiating warranties and indemnities. The buyer will usually require the seller to provide warranties (promises about the state of the company or business) and indemnities (promises to compensate the buyer if certain issues arise).
Here at Rubric, our aim is to protect our client’s interests and facilitate a smooth, legally compliant transaction.
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