Share Purchase or Asset Purchase – Which is the best option for you?
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Share Purchase or Asset Purchase – Which is the best option for you?
There are two principal methods of acquiring a business; a share purchase and an asset purchase. While both structures can achieve broadly the same commercial objective, there are fundamental differences in both the legal effect and the tax treatment of the two methods.
Advantages and disadvantages to a share purchase or an asset purchase
In the tables below we set out the advantages and disadvantages for both a share purchase and an asset purchase.
Share purchases
In a share purchase, the buyer acquires the shares in the company which is carrying on the business (the target company). The purchase is made from the existing shareholders.
| Advantages | Disadvantages |
| Stamp duty payable by the buyer will be charged of 0.5% on the purchase price. Contrast this with stamp duty land tax payable on an asset purchase deal where real estate forms an integral and valuable part of the business (eg hotels, garden centres, pubs and care homes) charged at rates of up to 5%. | The target company is acquired ‘as is’ so there will be less opportunity for a buyer to ‘cherry pick’ (as will often be carried out on an asset purchase deal).
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| Simplicity is also a factor – a share purchase deal means that there will be no need to list out all the assets that are included and assets that are excluded (as is the case on an asset purchase deal). | Share purchase agreements place many obligations on the seller in terms of warranty and indemnity cover. The ability and willingness of the seller to stand behind those obligations will need to be considered carefully. |
| No transfer of real estate is required (as would be the case on an asset purchase deal); if the property is leased, there will be no requirement to seek landlord consent. | Where the target company has multiple shareholders, the consent and involvement of all the target company’s shareholders will be required. |
| It is less disruptive to trading. Relationships and contracts with suppliers, customers and bankers (among others) pass automatically to the buyer of shares, and for the most part, no consents are required from the trading parties for the buyer to have the benefit of these arrangements. | More extensive legal, financial and tax due diligence on the target company will be needed because tax liabilities, and current and historic trading liabilities of the target company are inherited by the buyer and so costs are usually higher. |
| Key operating licences and regulatory permissions required to operate the business may well be unaffected by the transaction (but note there may be exceptions to this depending upon the sector). | If the target company’s assets were originally acquired for less than their market value, then at the date of the share purchase the target company will have latent gains that may crystallise if the assets were ever to be extracted from the target. Consequently the contract is usually more complex to cover off these risks. |
| Employment is unaffected by the transaction; no employee consultation or other measures will be required. This is positive because such aspects can often impact the timing of a transaction.
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The shareholders of a corporate seller will not receive sale proceeds directly. Sale proceeds will need to be extracted from the company. The seller will need to consider the repatriation of the funds and any potential blockers to paying out post-sale dividends prior to commencing the transaction. |
| There is more chance of structuring the transaction as a simultaneous exchange and completion rather than having a gap between the two; avoiding a split exchange and completion will remove the demand for the buyer to pay a deposit to the seller on exchange. This will likely benefit the cash flow of the buyer. |
Asset purchases
In an asset purchase transaction, the buyer takes over the target business by acquiring a collection of specified assets and rights, and sometimes assuming responsibility for certain liabilities, which together comprise the target business. The question of exactly which assets, rights and liabilities of the target business will be transferred to or assumed by the buyer as part of an asset purchase deal is a matter for the parties to negotiate.
| Advantages | Disadvantages |
| Easier to leave behind unwanted or problem assets, liabilities and contracts. | SDLT is charged at rates of up to 5% on commercial property. An asset purchase buyer will not usually inherit tax liabilities and so no tax input will be required on an asset purchase deal. |
| Seller may be more receptive to standing behind the warranties since they are often less onerous and far reaching. This is because the warranties and the warranty process tend to be lighter on an assets deal.
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A deal will need to be reached in respect of existing trade debts and whether these should be acquired by the buyer and whether the buyer is expected to pay for them.
Consideration needs to be given to what rights or obligations will there be to collect any debtors after completion and whose responsibility will it be? |
| A split exchange and completion is more likely with an asset sale, and the buyer will likely need to fund the deposit at exchange (typically 10% of the purchase price).
Risks associated with the period between exchange and completion need to be dealt with in the contract. The parties will need to comply with protections imposed by employment legislation (TUPE) which will include running a consultation process with employee representatives, confirming any measures to be taken and a series of indemnities in the asset purchase agreement. |
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| Any contracts of the target business with customers or key suppliers may need consent from those customers or suppliers to transfer to a buyer, which may mean telling them about the transaction before it completes – which is not ideal. |
Further advice on a share purchase v an asset purchase
Choosing whether to acquire a business via a share purchase or an asset purchase can be difficult. Speak to one of our experienced Corporate lawyers who will be able to advise you on the best option for you.
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