If you’re planning to buy or sell a business, it is useful to know the key differences between the two main ways in which a deal can be structured: asset purchase or share purchase, to help you decide how you are going to approach the deal.
Some of the key areas to consider include:
- What assets will be sold;
- Whether any liabilities will be transferred;
- What will happen with the employees; and
- Tax implications.
Under an asset purchase, the parties can pick and choose which assets form part of the deal. This might mean that all of a company’s assets are sold, or it could involve the sale of only selected items.
When selling the shares in a company, ownership of the whole of the company will be transferred.
Unless a seller is only selling part of a business, such as a particular branch or product area, a seller will generally prefer to sell the shares as they will be relieving themselves of all the obligations and liabilities that come with the business.
In this situation, if you are buying the shares, you will want to ensure that you carry out sufficient due diligence enquiries and that the sellers provide warranties at a suitable level to protect you against the potential risks that you are taking on.
In contract, as a buyer, you might be more inclined to opt for an Asset Purchase so that you don’t take on any unknown liabilities or risks, and you can be more selective about which liabilities you agree to take on.
However, this may not be a viable option for some sellers, if they would be left without the means of satisfying any liabilities left behind after the business has been sold.
With a share sale, the employees will remain employed by the company (except for any sellers who are resigning from their posts as part of the sale).
Under an asset sale, the requirement to transfer employees’ contracts will depend on whether the business is being sold as a going concern – i.e., is the business going to be carried on in substantially the same form following the sale?
If, for example, you are acquiring the premises, stock and customer lists and will be carrying out the same activities as the seller, then the sale will almost certainly be of ‘a business as a going concern’ and the employees will have a right to have their employment contracts transferred over to the new owners. There may be consultation requirements, depending on the number of employees involved, and you may need to terminate the contracts of any employees who do not want their employment to be transferred. In some circumstances, the seller may even have additional costs of entering into settlement agreements with non-transferring employees to resolve any issues surrounding their termination.
If, on the other hand, you are only acquiring a customer list but no other assets, then it is less likely that this will apply.
However, it is important to get advice on a case-by-case basis, to ensure that the correct procedures are followed and that any employees of the business are treated properly.
Asset purchases and Share purchases will be subject to different tax treatments.
Generally, there may be capital gains tax payable by the seller regardless of the type of deal, although this will depend on whether you are entitled to claim any exemptions or reliefs.
Under a Share Purchase, the seller may need to pay Stamp Duty on the shares, dependant on the value of the purchase price.
In contrast, under an Asset Purchase, VAT may be payable by the buyer. If the sale is of a ‘business as a going concern’ then it will be exempt from VAT, but if the deal doesn’t meet the requirements, then VAT on top of the purchase price. If an Asset Purchase involves a purchase of land, then Stamp Duty Land Tax may also be payable.
We would always recommend seeking the advice of an accountant or tax expert on the possible tax implications before agreeing any form of business sale.
If you’re looking to buy or sell a business or need advice on any of the issues referred to above, please feel free to get in touch.