Is it Best To Sell A Business By Way Of A Share Sale Or Asset Sale?
If you’re thinking of buying or selling the business of a limited company an initial consideration should be whether you decide to structure the sale as an asset of share transaction.
As always, there are advantages and disadvantages of both approaches and before you take any decisions or start negotiations, you will need to take appropriate professional advice.
This post covers the main considerations to bear in mind as you start planning your company purchase or sale.
What is a share sale?
On a share sale, the buyer pays an agreed sale price to the shareholders themselves for the shares they own. Details of the transfer of ownership of the shares are then lodged at Companies House and the buyer becomes the new owner. Beyond that, there is no change to the underlying business in that it continues to be owned and operated by the same company.
By buying the shares the buyer therefore acquires the entire enterprise – assets, as well as all liabilities. This is of course attractive to sellers as it represents a clean break, although it’s also not uncommon for the parties to agree that the seller should stay on in some role for a period of time following completion and the seller may be subject to earn out provisions during such time.
What is an asset sale?
With an asset sale, the buyer pays an agreed price for the defined assets being acquired from a company. All other assets and liabilities are retained by the seller and no transfer is recorded at Companies House.
The business continues to be owned by the original owners albeit that the value and functionality of the company may be significantly reduced.
The assets being acquired will often include goodwill, trademarks, patents, the customer database, software, content and websites.
Share sale process
In the case of a share sale the due diligence process is likely to be longer and more complex than an asset sale, as full investigations are carried out, particularly into the extent of any liabilities.
There will also be the need to negotiate appropriate warranties and indemnities to protect the buyer against any foreseen or potential liabilities as far as possible. These negotiations can be time consuming and difficult, thereby increasing the risk that the agreement will fall through. Having said that, a good solicitor should be able to guide you through the process and be able to find ways around any sticking points so as not to compromise a deal.
In the course of his or her ownership, the seller may also have given a number of personal guarantees (i.e. for an overdraft, hire purchase agreement etc.). It is unusual in such a situation for the other party to the personal guarantee to agree to waive or transfer the guarantee, meaning the liabilities may have to be cleared by the seller before the sale, or the buyer agree to indemnify the seller in case any personal guarantee is still in place following completion.
The result is that share sales can take longer to complete and be more expensive in terms of professional fees.
Asset sale process
A sale of assets on the face of it, may appear more flexible, straightforward and quicker, with less due diligence required. Asset sales are generally a matter for management, whereas articles of association and shareholder agreements, as well as possible issues with minority shareholders, can sometimes impose conditions and restrictions on the sale of a company’s entire issued share capital.
That means that with an asset sale there may be less chance that things may come unstuck due to unexpected issues or a breakdown in the negotiations.
Note however that an asset sale isn’t always plane sailing and can be complicated as each asset needs separate consideration. As it’s not uncommon for buyers to prefer an asset sale, the seller is in a strong negotiating position – after all, he will continue to have much of the risk and liabilities after the sale.
Assets may require individual valuations or interested third party approval (i.e. landlord approval) both of which can cause delay or derail the agreement, particularly if the third party refuses to agree.
Different assets will also require different methods of transfer, including the assignment and novation of contracts, which can also cause delays or additional costs.
Advantages of a share sale
One of the big advantages of a share sale is the continuity it provides to the entire business operation and management. Following the sale, it is, quite literally business as usual.
The buyer steps into the shoes of the seller and takes over everything from customers, supplier contracts, bank accounts, the website and tax. That also means there is no disruption to:
- VAT registration and returns;
- PAYE arrangements;
- Third party contracts; or
- Tenancy and licence arrangements held by the company.
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) do not normally apply to a share sale. So, while all existing contracts of employment remain in place, the buyer has a measure of flexibility and freedom when it comes to evaluating the workforce and or making any changes.
Disadvantages of an asset sale
With the advantages of being able to cherry pick the assets in an asset sale, come the challenges that can be faced with the loss of continuity.
Not all the assets may have been acquired by the buyer which can leave the business trying to operate without important licences and contractual rights. For example, key social media accounts may not be transferable and the loss of this kind of collateral can be significant.
An asset sale can also cause damage or loss of important customer and supplier relationships which often means having to renegotiate terms. Loyalty and goodwill can be hard to rebuild.
A transfer of assets does also usually trigger the TUPE provisions and that means the buyer takes on all existing employees on the same contractual terms as they had before. This can be a considerable liability if there are under-performing or excess employees and can make it difficult to alter the terms of individual contracts.
Tax implications of an asset sale
Another key consideration on the sale of a limited company is the tax treatment of share and asset sales respectively.
If most of the agreed sale price in an asset sale situation is for goodwill and only a small proportion for fixtures, fittings and stock, it creates a situation on the balance sheet where from HMRC’s perspective, a significant gain has been made!
The seller will have to account for that gain and the proceeds of sale and that will normally trigger a chargeable gain subject to corporation tax – i.e. a gain that appears on the balance sheet that the company has to pay corporation tax on. However, as always, it is essential to take professional tax advice about this and about any available relief or mitigating techniques.
Shareholders of a company which has sold assets will be paid out of profits net of tax, and then the shareholders will in turn have to account for those dividends which may well trigger a tax liability for them. The net effect is that the proceeds of sale may have in fact resulted in two separate taxable events and tax liabilities.
However, it’s not always detrimental tax wise to enter into an asset sale. For instance, if assets are sold at a loss, it may be possible to offset that loss against profits.
The sale proceeds can also sometimes be used to pay off any pre-existing and outstanding director’s loan accounts, meaning the seller / owner of such loan accounts doesn’t have to pay tax on the payment.
Most assets (apart from land) will be exempt from stamp duty and in most cases the sale will not give rise to a VAT liability (if the sale qualifies as a “transfer of a business as a going concern”).
From a buyer’s point of view, an asset sale can be more tax efficient. If a buyer has paid one price for a number of assets, that buyer can then decide what price is entered into the company accounts for each asset. That means the buyer can enter a higher price on those assets on which he can claim depreciation (i.e. stock or IT equipment). The buyer also would not normally take on the seller’s tax liabilities.
Tax implications of a share sale
In the event of a share sale, shareholders sell the shares and they (not the company) must account for any tax liabilities.
Capital gains tax may be payable by the seller and the rate may be lower than the income tax applied on an asset sale. Share sales are also VAT exempt. However, one would need to take professional tax advice for further details of applicable tax rates.
There may be other tax advantages for the buyer too, particularly if there are any accumulated business losses. However, this has to be weighed against the stamp duty liability that is likely to arise in respect of a share acquisition.
So, asset or share sale?
Sometimes, there may be little choice as to whether you buy assets or shares, for example, if a valuable asset cannot be transferred or if the seller has had little interest in a share sale.
There will always be a larger element of risk for the buyer with a share sale, with the risk (however remote) of an undiscovered and costly liability arising. Then there’s the additional costs and time involved in the due diligence process and negotiations of a share sale.
Many share sales are driven because the seller is usually able to take advantage of Business Asset Disposal Relief to reduce the capital gains tax liability they would otherwise have. Note though that in asset sale scenarios sellers can still take advantage of Business Asset Disposal Relief, for example when a sole trader sells all or part of their business.
This is a complex area (particularly when it comes to taxation) and every situation is different. In order to weigh up the best option, you will need professional legal and financial advice. This should include consideration of your objectives and exit strategy, specialist advice in respect of the assets and liabilities of the company in question and in respect of the tax implications of the sale.
As a final point, and for further information and views, there is a useful discussion being developed on this reddit thread.
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