Top 10 differences between the sale of company shares v business assets

If a business is operated through a limited company, there are two different approaches for a sale. Either the shares of the company are sold by the shareholders (referred to as a “share sale”), or the company sells its trade and assets, and the shareholders are left to liquidate the company and distribute the proceeds between themselves (referred to as an “asset sale”). Comparing the two methods isn’t straightforward. I’ve tried to set out below some headline differences, but the devil is in the detail and you should always take professional advice to see how this applies to your own individual circumstances.

1. Impact on the company

Under a share sale, the company itself remains entirely untouched. It’s just a sale of share certificates. All of the assets and liabilities remain within the company, and all its trading relationships and activities remain unchanged. However, it’s worth pointing out that some customer contracts may have a “change of ownership” clause in them giving the customer an option of extracting themselves from the contract if the company is sold. A buyer will want comfort that this right won’t be exercised, potentially by being introduced to these customers before completion.

By comparison, an asset sale leaves a company with cash in the business, together with some liabilities to settle before the company is liquidated. Any customer contracts, and supplier contracts, may well need to be formally novated (replaced with a new contract) to the buyer, which can cause short delays.

2. Employees

As explained above, a share deal leaves the company entirely intact, including its contracts, and that equally applies to its employment contracts. So from an employee perspective nothing changes other than the owners.

However, for an asset deal the employment contacts will by law (following something called “TUPE”) transfer to the buyer. This protection was put in place to prevent buyers from leaving staff stranded in the shell company. Compliance with TUPE regulations is far from straightforward, and we would always recommend an employment lawyer is involved in overseeing this process.

3. Tax relief for the buyer

Historically, an attraction of buying the assets rather than the shares is that the buyer obtains tax relief on many of the assets they were acquiring, including the goodwill. The tax rules relating to this have been reformed in recent years, and depending upon the circumstances of the deal, the reliefs are now often only marginally more attractive than purchasing the company shares. 

In contrast, on a share purchase, there is no immediate tax relief for the buyer. They must wait until their newly acquired shares are sold in the future. A gain or loss is then calculated and tax paid or relieved only at that point, which could be many years into the future.

4. Tax payable by the seller

For a share deal, personal shareholders will pay tax on their gain (being the difference between the amount they originally paid for the shares and the sale price, less any deal costs). Pretty straightforward.

An asset deal is not as tax efficient for the seller. Firstly the company will pay corporation tax on any gain arising from the sale of its assets and goodwill. Then, when the company is liquidated and the cash distributed to the shareholders, there will be a second tax charge for the shareholders on the gain they have benefitted from. This double tax charge is why most business sellers would prefer to do a share deal as opposed to an asset deal.

5. Potential liabilities

For a share deal, the buyer will inherit any hidden liabilities that may appear. It really doesn’t matter who owned the company when the liability was incurred. For this reason, they will ask for the seller to give certain warranties and indemnities, effectively guarantees, that the company doesn’t have any such issues. This gives the buyer some legal come-back if it is later established that there is a problem, but this usually only lasts for a year or two after the deal is done (unless it’s a tax issue which tends to be far longer).

For an asset deal, any such hidden liabilities will remain with the company and are unlikely to transfer to the buyer. This means that the list of warranties and indemnities that a seller will be expected to give can be much shorter.

6. Legal work

Partly because of the warranties and indemnities issue mentioned above, the legal contract covering a share deal is typically far longer than a contract for an asset deal. However, an asset deal is more likely to involve various other supplementary contracts such as property leases and novated contracts.

7. Due diligence

As a share buyer is inheriting the history of the business, including potential hidden liabilities, the amount of investigative work they will do before the deal completes, often referred to as due diligence, will be far greater. Buyers don’t want to have to rely on making a claim against the warranties and indemnities as it is a slow and difficult legal process. Much better to go into the deal knowing as much as possible about any risks. As a result, a share deal will potentially take longer to complete.

8. Bank requirements

If a bank is being used to help fund the deal then they will want reassurance that appropriate due diligence has been undertaken before they lend any money. So, if it’s a share deal, the extent of the due diligence work is likely to be far greater. In such instances, it will always be much more timely and efficient to dove-tail the buyer and the banks due diligence requirements together.

9. Tax losses

If the Company has made tax losses in the past, under a share deal there is a chance that these tax losses may be relievable against future taxable profits. As such, they have a value to the buyer (albeit if the business has been making losses then this might be a moot point!). For an asset deal, any such tax losses will be stranded in the company and lost.

10. General rule

We tend to say, “If you’re going to sell, sell shares; and if you’re going to buy, buy assets”. So who wins? It’s usually decided by competitive tension. The more buyers in the process, the more likely they are to accept a share deal.

If you’d like to explore the potential sale of your business, please get in touch.

Call 0330 024 0888 or email corporatetransactions@larking-gowen.co.uk

Next month: Top 10 tax considerations when selling a business