When considering buying or selling a business, it is crucial to understand as to whether that deal will proceed by way of the sale and purchase of the business and assets or by way of a share sale.
Asset Purchase
An asset purchase typically involves the buyer acquiring a collection of specific assets and rights. As well as buying such assets, the buyer may also agree to assume responsibility for certain liabilities of the business. Such liabilities may be assumed by agreement (e.g. in respect of an existing contract) and some may be an operation of law (e.g. liabilities in respect of any employees of the business).
The question of which assets will be included in the sale is part of the parties’ negotiation process and the assets included in the sale are set out in an asset purchase agreement. Items that are commonly acquired as part of an asset purchase transaction include but are not limited to;
- Plant and machinery;
- Stock;
- The benefit of business contracts;
- Intellectual property rights; and
- Goodwill and the business name.
Asset purchases are generally seen as more favourable to the buyer as the rule of thumb is that a buyer can choose to leave unwanted liabilities behind. By acquiring only specific assets and assuming selected liabilities, buyers can avoid the possibility of inheriting legal or financial risks that are associated with the seller’s broader business operations.
However, asset purchases can become unwieldy and overly complicated if the target business is complex, as most asset purchases require the renegotiation or transfer of contracts and agreements associated with the required assets. This process can be time-consuming and may also involve the consent of third parties, which could pose challenges and potential disruptions to ongoing business relationships.
Share Purchase
In a share purchase, the buyer purchases the shares of the company from its existing shareholders – the business itself is not sold and purchased, the business continues to be run by the same legal entity as previous but the owners of that legal entity have changed.
One of the biggest advantages of a share sale is the continuity that comes with that purchase. By acquiring the entire company, including its name and reputation, the buyer can maintain the business’s existing business operations and relationships with minimal disruption. However, because a share purchase cannot exclude existing liabilities, known and unknown, the level of due diligence needed in a share purchase can be more challenging than in an asset purchase. The buyer needs to carefully assess the entire business, including all its historic tax affairs, financials, contracts, intellectual property, and legal compliance which requires a comprehensive evaluation of the company’s operations to determine the risk of acquiring that company.
In conclusion, asset purchases and sale purchases represent two distinct methods of acquiring a company or its business and assets. A primary driver in establishing which is appropriate is often tax. Different tax treatments associated with each structure, as well as the assumption of liabilities associated with a share purchase, means that we would generally expect a different price to be agreed between buyer and seller depending on which option is chosen. Careful analysis and consultation with both legal and financial professionals are essential to evaluate and determine the most appropriate approach for the specific business transaction.
Here at Swinburne Maddison, we are highly experienced in such matters and have a strong track record of delivering successful outcomes for all stakeholders. Should you wish to have an initial chat, please call 0191 384 2441 and ask to speak to a member of our Corporate and Commercial team, or email Partner in the team, Alex Wilby, at aw@swinburnemaddison.co.uk.
This article is for general information only. It does not and is not intended to constitute legal or professional advice. The law may have changed since this article was published and we would always recommend that you seek specific advice on any particular legal issue.
