If you’re buying a business in the UK, the two main procedures available to you are an asset sale and a share sale. While both approaches work towards the same objective, there are key differences between the two that need to be taken into account. There is no definite answer to which will suit your goals best, as much will depend upon your personal and financial circumstances.
There are advantages and disadvantages to both mechanisms, and knowing the main differences will help to inform your decision. Understanding this will help to answer the question, ‘asset sale vs share sale: which is best?’
Comparing asset sale vs share sale
An asset sale involves the purchase of both tangible and intangible business assets. The buyer can choose which assets it wants to acquire, which means they can be more selective in what they inherit. This also allows the buyer to choose which liabilities they acquire, which can minimise potential risks.
In a share sale, the buyer acquires the shares in the business directly from the shareholders. Unlike an asset sale, there is no scope for cherry-picking with this approach. Instead, the buyer takes on all assets and liabilities in the purchase agreement.
Sale of Assets: advantages and disadvantages
To discuss the merits of asset sale vs share sale, it’s useful to consider the potential positives and negatives of each strategy. This approach can minimise liabilities, add a greater degree of choice, and offer a clean break. Regarding the sale of assets, advantages and disadvantages become clear for both buyer and seller.
Advantages to seller
From the seller’s perspective there are a range of advantages to an asset sale. Firstly, warranties and guarantees come from the company itself and not individual shareholders. The seller can also choose which assets to include in the transaction and there will be less indemnities to the buyer as a result.
Broadly, there are fewer risks to the buyer with an asset sale, which can result in a quicker process for all parties. There are potential tax benefits, such as allowable losses on assets — which can reduce Capital Gains Tax. Additionally, if an asset is sold for less than its written-down value, an allowance can offset the resulting loss against income or gains.
Disadvantages to seller
In the case of an asset sale, the main disadvantage is that liabilities are likely to stay with the seller. Ensuring that contracts, properties, employees etc. remain in place can also be complex and time-consuming. Finally, there are potential additional tax charges, including corporation tax at the beginning and, later, when sale proceeds are either taken from the company or divided among shareholders.
Advantages to buyer
During the sale of assets, advantages and disadvantages to the buyer are effectively the polar opposite of those of the seller.
Firstly, any business liabilities are not usually the responsibility of the buyer, who can also pick and choose which assets to acquire. This also gives them the opportunity to consider tax implications for those assets. Finally, there may be some tax reliefs available, depending on what kind of assets are included in the purchase.
Disadvantages to buyer
Some assets, such as employment contracts, may need third-party consent to complete the sale — which can take time, and an agreement is not guaranteed. While the buyer can pick and choose certain assets, this does not include the transfer of employees, so the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) obligations will need to be met. Similarly, if the party acquiring intends to change the nature of the business, any purchased assets may be liable for additional VAT which cannot be recouped.
Finally, there are also property factors to consider. Specifically, the tax burden could exceed stamp duty charges from a share sale.
Sale of Shares: advantages and disadvantages
For the sale of shares, advantages and disadvantages are distinct for both the buyer and seller. For buyers, a share sale can be a good way to explore new markets, but risks can increase. For sellers, the process can be simpler than an asset sale, but indemnities can increase. These factors can be simplified by seeking thorough legal guidance.
Advantages to seller
Firstly, a share sale offers a clean break to the seller, so any existing liabilities become the sole responsibility of the new ownership. Continuity is also easier as the business becomes a going concern and a range of tax reliefs may become available. These include:
- Substantial Shareholding Exemption (SSE): Under certain conditions, the party selling shares in a trading company may avoid corporation tax on gains, including ‘degrouping’ charges.
- Business Asset Disposal Relief: Officers or employees of the target company can enjoy a 10% CGT rate, capped at £1m, for share disposal gains.
- Share for Share Exchange: If payment for the share sale is in buyer’s shares or loan notes, selling shareholders might be able to delay the gain until they sell acquired shares or notes.
A law firm with a specialism in mergers and acquisitions will be able to advise upon the sale and offer the best route to a timely and beneficial outcome.
Disadvantages to seller
In a share sale, the target company commonly assumes all liabilities. If directors are required to offer personal guarantees, this can expose them to personal liability. Additionally, part of the price might be held in trust or secured with a bank guarantee and the buyer might discount the price due to the higher risks involved.
Regarding charges, retained assets could trigger taxes, and ‘degrouping’ charges might occur due to prior asset transfers.
Advantages to buyer
If the target company has an established brand, the buyer can benefit from this and buy into a profitable brand and market. Third-party consent might not be required for existing contracts and there are potential savings available. These savings include favourable stamp duty rates and zero VAT.
Disadvantages to buyer
There are relatively few disadvantages to the buyer with a share sale. The most obvious downside is the lengthy due diligence required to minimise the risk of inherited liabilities. Additionally, while the selling shareholders offer indemnities for company liabilities, there’s a possibility they might lack the means to fulfil these indemnifications when required.
Asset sale vs share sale: which is best?
The question of asset sale vs share sale depends on factors like control over transferred assets and liabilities, tax implications, and due diligence requirements. Asset sales offer control and liability reduction but may trigger capital gains tax. Conversely, share sales provide streamlined transactions for buyers that encompass the entire business but may demand comprehensive due diligence due to any assumed liabilities.
The final choice depends on factors like the complexity of the business, the parties’ goals, and negotiated terms. Ultimately, professional guidance will be required to align the most suitable approach with your specific circumstances and goals.
Expert guidance for share and asset sales
When considering share or asset sales, each option has its advantages and disadvantages depending on your goals. With so many factors to weigh up, it is essential to work with experts who specialise in every aspect of commercial transactions. You need a team that can adapt to your objectives and seamlessly handle commercial, employment, and real estate matters.
As the UK's largest regional and professional services provider with 23 offices across the country, we provide practical, tailored solutions for mergers and acquisitions alongside synergistic services for private clients. Our experienced professionals have facilitated multimillion-pound deals both domestically and internationally.
Whether you’re buying or selling a business, you can trust our team to manage every detail. For prompt, practical support built around your needs, contact us today.