Buying or Selling a Business – the Primary Considerations

When looking to buy or sell a business one of the primary considerations is whether the sale is to be a be sale of assets or a sale of shares. In this article we consider each and discuss the advantages and disadvantages depending upon whether you are a buyer or seller.

What is an asset sale?

An asset sale is a sale by a sole trader, partnership or company of its receivables and rights owned and used in the course of the business. Commonly most of the assets of the business are included in the sale to allow the buyer to take over the business as a going concern, but this is not necessary and the seller may sell the assets to several different buyers.

The sale is then facilitated by an asset purchase agreement (APA).

What is a share sale?

A sale of shares is the sale of company shares by the shareholders (owners of the company) allowing the company to continue its business as a going concern, retain ownership of all its assets but also all its liabilities in the company’s name.

The sale is then facilitated by a share purchase agreement (SPA).

The pros and cons of an assets purchase:

Advantages:

For the buyer:	For the seller:
The buyer can decide what assets that they wish to acquire, and ‘carve out’ those assets and liabilities that they wish to leave with the seller.	The seller can ‘carve out’ any assets that they may wish to retain or sell to a different buyer.
The due diligence process generally takes less time and is less extensive than a share sale.	The seller may be required to provide fewer warranties and indemnities than are required in a share sale, and in the event that the seller is a corporate body the warranties and indemnities may be provided by the company rather than the individual shareholders.
The ancillary paperwork which is required in respect of the transaction is usually less extensive as no corporate documents and forms are necessary.	The due diligence process generally takes less time and is less extensive than a share sale.

Disadvantages:

For the buyer:	For the seller:
Certain asset transfers may require additional property documents and consents, and this may also give rise to additional tax obligations such as stamp duty land tax/ land transaction tax.	If assets are sold ‘piecemeal’ this can leave the seller with assets that they are unable to dispose of, and liabilities that may prove burdensome.
Clients and suppliers may not wish to novate (transfer) contracts to the buyer and continue a relationship with the new owner.	If the seller is a company rather than an individual, once all assets have been sold and liabilities paid, the seller will need to extract the net sale proceeds and wind the company up.
If there are employees working in the business prior to the transaction, the buyer must comply with TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006).	Consent from third parties may be needed for the transfer of certain assets, such as property or equipment leases.

The pros and cons of a share purchase:

Advantages:

For the buyer:	For the seller:
Employees remain employed by the company and will continue under their existing contracts of employment as there is no ‘transfer’ and TUPE does not apply.	The seller is able to dispose of every aspect of the business including any liability past and present and have a ‘clean break’ subject to any warranty protection and indemnities that the buyer is able to negotiate.
Customer and supplier contracts are likely to remain with the company (subject to any change of control provisions) allowing for less disruption and allowing the buyer to continue to benefit from the company’s goodwill and reputation.	A sale of shares allows continuity of trading, with limited disruption and a higher degree of confidentiality regarding the transaction.

Disadvantages:

For the buyer:	For the seller:
The buyer will ‘inherit’ all past and current liabilities of the company (including any outstanding tax obligations) and, therefore, extensive due diligence is required to ascertain the level of risk together with appropriate warranty protection and indemnities from the seller.	If the sellers wish to retain any assets, they will need to make separate arrangements to transfer the assets from the company (rather than simply excluding them) prior to completion of the sale.
The due diligence process generally takes more time and is more extensive than an asset sale.	The buyer will likely require extensive warranties and indemnities directly from the shareholders.
	The due diligence process generally takes more time and is more extensive than an asset sale.

Summary:

The best option for the sale or purchase of a business is, therefore, dependent on each party’s objectives and their respective negotiating power together with any particular concerns that they are seeking to mitigate.

Whichever route you decide to take for the sale or purchase of a business, you should always obtain specialist legal advice on your position and try to minimise the risk of any future liability.