ASSET VS SHARE SALE: CONSIDERATIONS FOR BOTH SELLERS AND BUYERS

Our infographic summarises the key issues from both the buyer's and the seller's perspectives.

One of the most important choices when selling (or buying) a business is how to structure the sale. It is important to understand this from both perspectives, to know what is best for you and also to understand the negotiating position of the other party. Our infographic on this topic from a couple of years ago was very popular so we’ve updated it for the current 2020 context and made the infographic downloadable as a full pdf.

Download our pdf infographic on this topic here.

Business sales can be structured as either the sale of the company itself (i.e. the entity, usually a Limited Company in the UK), or the "business and assets" of the company, meaning that the buyer does not take on the entity itself but simply purchases some or all of the assets from the company. The former is known as selling all of the outstanding share capital of the company, or the "shares", and the latter is known as selling the "business and assets" or simply the "assets".

The choice of whether to sell the whole company or simply the assets is an important one. It is multifaceted and should be addressed on an case-by-case basis under the advice of legal and accounting professionals. But many of the principles apply to all buyers and sellers of businesses in the UK, so we have captured these principles in the easy to follow infographic above.

COMPLEXITY

Generally speaking a share sale will be more straightforward, because the entity simply transfers to the acquirer. Bank accounts, VAT registration, contracts with employees, with third-party contractors and suppliers, all remain the same and business carries on as usual. With an asset sale each of these needs to be renewed in the name of the company that now owns the assets. Besides being time-consuming this can also trigger a reassessment of credit terms, a re-negotiation of contracts and other events that would not usually occur with a share sale.

From the seller’s point of view a share sale is also much more straightforward. With an asset sale the owners of the company are left to distribute the proceeds, finalise tax affairs, and wind up the company.

However, with a share sale, liabilities are transferred to the buyer (not just assets). This means that with a share sale the buyer will typically engage in much more extensive due diligence prior to completion, and will require more extensive warranties and indemnities from the seller. Moreover it is impossible to fully indemnify against all unknown future risks, so from the buyer’s perspective, an asset purchase is always seen as a better way to limit risk.

EMPLOYMENT

The Transfer of Undertakings (Protection of Employment) Regulations 2006, usually referred to as TUPE, provide rights to employees when their employer changes due to the sale of the business they work in. In short it requires the new employer to give them identical employment contracts and not to end their employment for reasons relating to the sale of the business. Critically, TUPE regulations only apply in the case of an asset sale, since in a share sale the legal entity remains the same, so the employer has not changed.

Therefore in the case of an acquisition where some employees are thought to be under-performing, or where cuts to staff numbers are required, a share purchase gives the buyer some flexibility that would not exist with an asset purchase. There is a degree of complexity to the implementation of this law in practice, and acquirers should seek legal or specialist HR advice regarding the appropriate protocols (for example, new business cards and email addresses would not be appropriate if TUPE regulations were not to apply). Any changes must be made thoughtfully and with employees’ rights in mind, but at least with a share purchase some flexibility is available to the acquirer.

TAXATION

The tax implications for both buyer and seller of the different structures can have a substantial impact, and tax concerns are often the overriding factor in negotiations around the deal structure. From the buyer’s perspective the situation is complex and depends on the amount and nature of the assets being acquired.

For example, with an asset purchase the acquirer can claim tax relief for the value of the acquired fixed assets up to a certain value (currently £1 million) under the Annual Investment Allowance. With a share purchase this relief is not available. The acquisition of goodwill can also be amortised by the acquiring company in an asset purchase scenario, but not with a share purchase.

Share purchases are subject to 0.5% stamp duty, whereas stamp duty is not usually payable on asset purchases, with one important exception: property. If freehold property is one of the assets purchased, this will attract stamp duty of up to 5% on an asset purchase. For this reason a share purchase would be considered favourable to an acquirer of a company that held signficant freehold property assets.

A share purchase of a loss-making company can present the acquirer with the opportunity to offset losses from a previous period against future profits - something that is not possible with a share purchase.

From the seller’s perspective the most important tax consideration in the UK is Entrepreneur’s Relief. This allows the owner/s of a business to pay only 10% capital gains tax on the sale of a company (instead of 20%) up to a lifetime limit of £10 million. This is only possible with a share sale because only in this case is the individual owner selling anything. With an asset sale it is the company that sells the assets, and companies do not qualify for Entrepreneur’s Relief.

Furthermore, in the case of an asset sale, the funds the company receives for the sale of the assets, after paying corporation tax on the gain at 19%, must then be distributed to the shareholders. At this point tax is payable again. For this reason sellers almost always prefer a share sale to an asset sale.

Companies with large cash balances should plan ahead for this, with advice from their finance team, because of a technicality in the rules around Entrepreneur’s Relief that stipulate that only the assets (including cash) that contribute to “trading activities” are eligible for Entrepreneur’s Relief. If cash balances are above a certain level (often considered to be 20% of total consideration, but specific advice is needed in each case), the excess cash would be subject to the double taxation described above.

IN PRACTICE

It is important to quantify the benefit of each scenario so that this can be weighed against the other elements in the negotiation.  Each party must understand what selling (or buying) the assets or shares of the company will cost them, from a taxation perspective, so that if the other party insists on the less preferable option, this cost can be quantified. The seller may seek a higher price or other concessions from the buyer in order to compensate for the additional tax burden, or in a competitive bidding scenario the seller can of course weigh the entire offer, including these deal terms, against other offers.

It is easier to make pragmatic decisions when the costs can be weighed. For example, where the acquiring company will benefit substantially from capital investment allowances by purchasing the assets of a business, it may well be worthwhile for the acquirer to pay a premium to compensate the seller for the additional tax burden on the sale of the assets instead of the shares. If the premium demanded by the seller is less than the benefit of the capital allowances to the acquirer, all other things being equal, the deal would proceed as an asset sale.

Of course from a seller’s perspective the ideal scenario is a fiercely competitive bidding war, in which multiple acquirers are bidding against each other.  In this environment buyers‘ calculus may shift toward winning the deal against other buyers, instead of simply trying to extract maximum value. Conversely, in the opposite scenario where buyers are being courted and interest is low, the buyer has more power and can demand more from the seller.

All of the above considerations come into the negotiation.  Business owners should seek advice from their finance and legal teams to identify the preferred outcome, and to quantify the cost of conceding to the alternative deal structure at the buyer’s request.  This enables calculated decision making during negotiations and a higher likelihood of reaching agreeable terms quickly.

Download the pdf infographic to learn more about this important topic.