When it comes to selling or buying a business, two main approaches can be taken: an asset sale or a share sale. Each of these methods has unique legal, financial, and practical implications that can impact both buyers and sellers. Understanding the differences is crucial, as the structure of the sale can influence tax liabilities, legal responsibilities, and the overall value and ease of the transaction. This article explores the ins and outs of asset sales and share sales in the UK to help you make an informed decision.
What Is an Asset Sale?
In an asset sale, the buyer purchases specific assets of the business rather than buying the company itself. This approach allows the buyer to select exactly what they want to acquire, such as equipment, property, stock, customer contracts, intellectual property (like trademarks or patents), and goodwill. The buyer can pick and choose the assets they see value in, leaving behind any liabilities or undesirable assets.
The seller, meanwhile, retains ownership of the business entity itself. This means that once the transaction is complete, the seller is left with whatever is not sold – including any liabilities, debts, or unwanted assets. The buyer essentially takes over certain functions or parts of the business, but the legal entity (company) remains with the seller.
Advantages of an Asset Sale
For the Buyer
- Reduced Liability Exposure: One of the biggest benefits of an asset sale is that buyers generally take on fewer liabilities. Because they are only buying specific assets, they can avoid unexpected liabilities or legal claims tied to the company itself.
- Selective Purchase: The buyer has more control over what they acquire. They can leave behind assets or contracts that are too risky or do not add value, making the purchase more customised and potentially more profitable.
- Potential Tax Benefits: Buyers may enjoy certain tax reliefs based on the assets they acquire. This can be beneficial if, for example, they buy assets with tax-efficient reliefs that can reduce their tax obligations in the future.
For the Seller
- Flexibility in Retaining Assets: Sellers can keep parts of the business that they value or want to sell separately to another buyer later.
- Simpler Liability Picture: Since the seller retains the business entity, they do not need to transfer all existing liabilities to the buyer. This can simplify negotiations.
- Control Over Transaction Terms: Asset sales can be more flexible in terms of what is sold and how the sale is structured.
Disadvantages of an Asset Sale
For the Buyer:
- Complex Transfer Process: Each asset must be legally transferred, which may require new contracts, assignments, or even consent from third parties (e.g., landlords for leases or suppliers for contracts).
- VAT Implications: Asset sales can be subject to VAT, depending on whether the sale qualifies as a Transfer of a Going Concern (TOGC). If the buyer doesn’t plan to operate the acquired assets in the same way, VAT could apply, adding to the cost.
- Employee Transfers and TUPE: In the UK, asset sales are subject to the Transfer of Undertakings (Protection of Employment) (TUPE) regulations. This means that employees of the business will automatically transfer to the new employer with the same terms and conditions, limiting the buyer’s ability to restructure immediately.
For the Seller:
- Potential Double Taxation: If the sale results in a gain, the seller may face both Corporation Tax on the gains from the sale of assets and further tax when distributing the proceeds to shareholders. This can make asset sales less attractive for sellers from a tax perspective.
- Complex Transaction Structure: Since the seller may retain liabilities, they may need to deal with creditors or resolve outstanding obligations even after the sale. Winding down the company or restructuring remaining assets can also take time and incur costs.
What Is a Share Sale?
In a share sale, the buyer purchases the shares of the company that owns the business and its assets. This means the buyer acquires the legal entity itself, including everything it owns and owes. This approach is often more straightforward than an asset sale because the buyer steps into the shoes of the existing shareholders and takes over the entire company “warts and all.”
A share sale transfers the entire business as a “going concern” – meaning the business continues as it is but with new ownership. In most cases, customers, suppliers, and employees continue on the same terms, which can provide continuity and minimise disruptions.
Advantages of a Share Sale
For the Buyer:
- Seamless Transfer: A share sale involves transferring the ownership of shares, not individual assets. This can streamline the process and avoid the need for new contracts or third-party consents.
- Continuity for Customers and Suppliers: Since the business continues to operate under the same legal entity, customer and supplier relationships are less likely to be affected. Contracts, agreements, and ongoing transactions generally stay in place, reducing the risk of losing business.
- Stamp Duty Advantage: Share sales may be subject to lower tax rates than asset purchases, particularly in cases where the business includes real property (e.g., land and buildings). This can make the acquisition more tax-efficient.
For the Seller:
- Simplicity in Transferring Liabilities: Since the buyer takes over the entire company, they also take on all its liabilities and obligations, both known and unknown. This can relieve the seller of potential future claims or liabilities.
- Tax Efficiency: Share sales are generally more tax-efficient for the seller, particularly if they are eligible for reliefs like Business Asset Disposal Relief (previously Entrepreneurs’ Relief), which can reduce Capital Gains Tax.
- Clean Exit: In a share sale, the seller typically exits entirely from the company without the need to wind it down, liquidate assets, or deal with creditors.
Disadvantages of a Share Sale
For the Buyer:
- Higher Liability Exposure: The buyer inherits all past liabilities, even unknown ones when they purchase the shares of the company. This includes any outstanding legal claims, debts, or tax obligations that could surface later.
- Due Diligence Requirements: Because the buyer assumes all liabilities, extensive due diligence is necessary. Buyers often hire accountants, lawyers, and other experts to examine the company’s financials, contracts, and tax records to identify any hidden risks.
- Longer Negotiations: Share sales often require detailed negotiations around warranties, indemnities, and protections for the buyer, which can add time and cost to the transaction.
For the Seller
- Approval from All Shareholders: Share sales require the consent of all shareholders. If some are untraceable or unwilling, it can complicate the transaction. However, if there is a shareholders’ agreement with “drag-along” rights, it may be possible to compel minority shareholders to sell.
- Warranty and Indemnity Demands: To protect themselves, buyers often ask sellers to provide warranties and indemnities, which guarantee that no hidden issues exist in the business. This can create additional risks for the seller if any problems arise post-sale.
Difference Between Asset Sales and Share Sales: Key Considerations
| Aspect | Asset Sale | Share Sale |
| Assets | Buyer selects specific assets and business activities. | Buyer acquires the entire company, assets included. |
| Liabilities | The buyer avoids liabilities, seller retains them. | Buyer inherits all liabilities (“warts and all”). |
| Employee Transfers | Governed by TUPE; employees transfer automatically. | Buyer inherits all employee contracts and terms. |
| Tax Implications | Possible VAT and double tax charge for the seller. | Typically more tax-efficient for the seller, subject to CGT. |
| Transfer Complexity | Each asset must be legally transferred; complex. | Simplified, as shares transfer ownership directly. |
Due Diligence in Asset vs. Share Sales
In an Asset Sale: Buyers typically conduct a targeted review of the specific assets they’re acquiring. This is simpler and faster since the buyer is not concerned with the entire company’s financial history or unknown liabilities.
In a Share Sale: Due diligence is more comprehensive, as buyers inherit all of the company’s liabilities. This means examining financial records, contracts, tax filings, employee agreements, and any other obligations the company holds. The process can be time-consuming and costly but is essential to avoid unpleasant surprises.
Which Is Right for You?
The choice between an asset sale and a share sale depends on your priorities, tax considerations, and risk tolerance. Here are some typical scenarios that might make one option more attractive:
- Asset Sale: If you’re a buyer looking to avoid unknown liabilities or “cherry-pick” the best parts of a business without taking on its risks, an asset sale might be ideal. For sellers, it’s useful when they want to retain part of the business or specific assets.
- Share Sale: This can be preferable for sellers seeking a clean break and potential tax efficiencies. Buyers who want a seamless transition of the business, along with all its relationships and contracts, might also prefer a share sale.
Legal and Tax Advice: Essential for Both Parties
Regardless of the approach, it’s essential for both buyers and sellers to seek legal and tax advice. In the UK, business sales have specific legal requirements and tax implications that vary based on individual circumstances.
- Legal Advice: A lawyer specialising in mergers and acquisitions can draft agreements, handle negotiations, and ensure compliance with TUPE (for employee transfers in asset sales) or necessary shareholder consent in share sales.
- Tax Advice: Tax professionals can provide guidance on potential reliefs, VAT considerations, and ways to structure the sale for optimal tax efficiency.
Both asset and share sales have unique advantages and risks. By understanding the implications and obtaining proper advice, you can navigate the process with confidence, whether you’re buying or selling a business.
