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Business sale and purchase – shares or assets? Which is best?

Pros and cons of buying/selling business assets An asset purchase involves the buyer only acquiring the assets (and certain agreed liabilities) that make up the business. The assets of the business may include tangible assets, such as land, machinery and stock, as well as intangible assets, such as intellectual property and goodwill. After the acquisition,

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Pros and cons of buying/selling business assets

An asset purchase involves the buyer only acquiring the assets (and certain agreed liabilities) that make up the business. The assets of the business may include tangible assets, such as land, machinery and stock, as well as intangible assets, such as intellectual property and goodwill. After the acquisition, the buyer will own the business and will continue to operate it using the assets acquired. The assets will be specifically identified in the sale and purchase agreement.

Advantages of business asset purchase

Free of liabilities – with an asset purchase, you pick and choose the assets you want to take (subject to negotiations with the seller). Because of its nature, in an asset purchase you also choose which liabilities, if any, you take on. The obvious advantage of this is that you can leave certain liabilities which may be onerous.

Apportionment of purchase price – Another advantage of an asset purchase is that you are able to apportion the purchase price between various classes of assets. This has various tax advantages, especially that the costs of assets can be reset to their market value at the time of purchase which will normally reduce the capital gains tax payable at a later date. Furthermore, as the sale involves a transfer of a business as a going concern, VAT is not chargeable.

Disadvantages of buying business assets and not whole business/company

Warranties and indemnities – If the seller is a company, the warranties and indemnities offered in the sale and purchase agreement would on the face of it be from the company, which in turns means they are potentially less valuable. One way of dealing with this is negotiating with the selling shareholders that they also personally give warranties and indemnities in the sale and purchase agreement. Additionally, key contracts of the business with third parties may require the third party’s consent before they are able to be assigned. It may be that some contracts cannot be assigned at all. This could reduce the value of the business for the purchaser.

TUPE

A common misapprehension is that buying assets means that the buyer will be able to avoid taking on liability for employees of the business. This may well not be the case as employees of the seller business will be subject to TUPE legislation (this is employment legislation) which has the effect of transferring employees’ rights and obligations to a buyer where “the whole or substantially the whole” business is sold. It is therefore a question of fact whether the sale is of the business in practical terms rather than just individual assets. If the seller or buyer attempt to dismiss employees because of the transfer (or because of a reason connected to the transfer), and they do not have a valid reason (under TUPE) for that dismissal, the employee may be able to pursue an unfair dismissal claim against the new employer as well as the sellers.

Tax

Tax disadvantages for a buyer of assets can include where a lease or property interest is transferred and stamp duty may well be payable. From the seller’s point of view, an asset sale is subject to two-tier taxation for the seller. The selling company will suffer corporation tax on the sale of the assets. There will then be a further charge when the proceeds of the sale are distributed to the shareholders. Because of this, the seller may charge a higher purchase price to take this point into consideration. Additionally, for any transfers of land, stamp duty will be payable.

Existing Contracts

Although the sale and purchase agreement could list warranties and indemnities from the seller, ultimately liability for third party contracts will still remain with the seller. This could be problematic for the buyer if the seller does not perform certain obligations.

Due diligence

It is also important to note that, buying assets requires very careful due diligence, if the seller sells assets whilst possibly insolvent, it is possible that on liquidation the assets could be clawed back. It is also imperative to check that any assets being bought are unencumbered and not subject to specific charges over them or other claims.

Buying the share capital of a company

A share purchase is where the buyer acquires the shares of the company that owns and operates the business. In such a transaction the ownership of the company is transferred to the buyer, but there is no other change in the business. This means taking over all assets and and ongoing liabilities.

Advantages of a Share Purchase

Simplicity – One of the main advantages of a share sale is that the transaction is simpler than an asset sale. Additionally, there is a lack of disruption to trade continuity, as from an outsiders point of view, very little will appear to have changed. There is also no change of employer, so employee contracts are not affected.

Contracts unaffected – Another advantage of a share purchase is that outstanding contracts remain unaffected legally by the change in ownership of the company. Additionally stamp duty payable on shares is only 0.5%, compared to a much higher percentage for land under an asset purchase.

Disadvantages of a Share Purchase

Liabilities come with it – One of the main disadvantages is that all the liabilities of the company (hidden or otherwise) remain with the company and indirectly become the responsibility of the buyer. Extensive investigations and wide-ranging warranties and indemnities are insufficient to protect the buyer in full. The buyer is therefore exposed to a certain degree of risk when purchasing the target company.

Because of the level of liabilities the buyer may be exposed to, they will need to secure extensive warranties and indemnities from the seller, which can prove to be quite difficult. Even if they obtain these, if the seller is bankrupt/insolvent and the buyer needs to rely on one of these, they still will not be able to recover their money.

 

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