Selling a Business: Share vs Asset sale – which works for me?

When looking to sell your business a key consideration is whether to transact via a share sale or an asset sale. Both have their advantages / disadvantages and it is important to make an informed decision as to which works best for you.

Share sales are only possible if you have a limited company, so sole traders and partnerships only have the ability to sell their assets.

In a share sale, you agree to sell part or all of the shares in the limited company that you trade through and which contains all the assets and liabilities of the business. The transaction is conducted between the buyer and the company’s shareholders in their personal capacity instead of the company.

By contrast an asset sale is just that; a transfer of specific assets to a buyer. In many cases the prior trading and tax liabilities remain with the seller too. This type of deal, unlike a share sale, is conducted between the buyer and either your company or you personally, depending upon with whom the assets currently are.

Advantages of a Share Sale

1, Continuity Contracts, including those with clients and employees, may be able to pass to a buyer without the need to follow any additional transfer provisions. If possible, this decreases the cost and administrative burden on both buyers and sellers, while also simplifying the overall transaction.

2. Entities involved in transaction A share sale will be between a buyer and the shareholders of the company directly. In an asset sale, if the company holds the assets, then it is the company itself which will be a party to the contract, which may cause issues with the distribution of funds to the respective shareholders following completion. This, coupled with potential tax advantages, may push you towards a share sale.

Disadvantages of a Share Sale

1.The sale process can be detailed and involved – As buyers will be taking on the assets and liabilities of the company, they will want to ensure they are aware of any potential issues that may arise in the future. This involves a process called due diligence, which will involve a detailed and involved analysis of the target company.

2. You may still be liable for certain matters even following completion Because the buyer takes on the liability of the trading company, you may still be asked to provide assurances to the buyer in the form of guarantees, warranties, and indemnities. These are some of the various assurances that sellers give to buyers under both asset and share sales in respect of the business and may provide the buyer with an ability to pursue you for their losses should any of them be invoked.

Advantages of an Asset Sale

1. Contents of the sale You can choose which assets will pass in the sale and which to retain. This gives you more flexibility to tailor the terms of the transaction to your needs.

2. You will normally be required to provide fewer assurances to the buyer As mentioned above, you will be retaining the liabilities of the business under an asset sale. As a result, you should not be required to provide as many assurances (in the form of warranties and indemnities, for example) as under a share sale which should reduce the scope of your liability to the buyer following completion of the sale.

Disadvantages of an Asset Sale

1. The liabilities of the company remain with you You will generally retain the liabilities of the business, which may not be ideal for a seller looking to exit the business altogether. An asset sale involves the transfer of the benefits of the assets, and all liabilities that arise following completion. For both buyers and sellers, this may be a useful tool to facilitate a transaction where there is a known liability which the buyer does not want to inherit.

2. Additional processes may need to be followed Contracts will need to be formally transferred (including supply and client contracts, and any property lease that may be applicable) from you to the buyer, which can take both time and is also subject to the risk of the other party not re-engaging with the buyer. There are also additional obligations in respect of employment contracts which must be followed.

Which type of sale is suited to my business?

The above considerations only provide a brief overview of the advantages and disadvantages for each type of transaction, and more detailed advice should be sought, especially with regards to the potential tax impacts.

Here at Herrington Carmichael, either our specialist complex transaction team or our small business transaction team can support you through every step of the transaction from the early negotiations right through to completion, with a service that is tailored to suit your company’s needs.

If you require further advice regarding acquisitions, sales, or any other Corporate matter, please contact Edward Beedham in our Corporate team.

Edward Beedham
Solicitor, Corporate
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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