Share purchase or buy assets?

When an individual or corporation wishes to buy a business, they may do this in one of two ways:

The purchase of the trade and assets

When a purchaser buys the assets and goodwill of a business, the entity that formerly owned the assets and carried out the trade remains in existence but sells off the trade and the assets to a third party who buys them. The purchaser does not acquire any of the liabilities of the former business. This method is often preferred when the buyer wants to avoid inheriting any existing debts or liabilities.

• Advantages:
  • Clean Slate: The buyer does not assume any of the seller's liabilities, which can include debts, legal issues, or other financial obligations.
  • Selective Acquisition: The buyer can choose which assets to purchase, such as property, equipment, and intellectual property, leaving behind any undesired assets.
• Disadvantages:
  • Complex Transfer: Each asset needs to be individually transferred, which can be time-consuming and require significant legal and administrative work.
  • Third-Party Consents: Some assets may require third-party consents to transfer, such as leases or certain contracts, which can complicate the process.

The sale of shares

In this case, the business remains as it was and continues to trade via the same legal entity. However, the ownership of the entity, usually a limited company, passes with the ownership of its shares to new owners who acquire not just its assets and trade but any liabilities that it may have. This method is common when the buyer wants to acquire the entire business operation as a going concern.

• Advantages:
  • Business Continuity: The business continues to operate without interruption, and contracts, employees, and customers remain with the company.
  • Simpler Transaction: The transfer of ownership is generally simpler as it involves the transfer of shares rather than individual assets.
• Disadvantages:
  • Inherited Liabilities: The buyer assumes all existing liabilities, which could include debts, pending lawsuits, or tax obligations.
  • Due Diligence Required: Extensive due diligence is necessary to uncover any hidden liabilities or potential issues within the company.

Considerations When Deciding Between Asset Purchase and Share Purchase:

• Due Diligence: In both scenarios, conducting thorough due diligence is crucial. Buyers need to understand what they are acquiring, including potential risks and liabilities. This process involves examining financial statements, legal documents, contracts, and other relevant records.
• Tax Implications: The tax consequences of each method can vary significantly. For instance, asset purchases may provide buyers with certain tax benefits, such as depreciating the purchased assets. Conversely, share purchases may have different capital gains tax implications for the seller and potential stamp duty costs for the buyer.
• Negotiation and Contracts: Both methods require detailed negotiation and well-drafted contracts. An asset purchase agreement (APA) will specify the assets being acquired and any assumed liabilities, whereas a share purchase agreement (SPA) will cover the terms of the share transfer and the liabilities being inherited.
• Regulatory Approvals: Depending on the industry and the size of the transaction, regulatory approvals may be required. This is more common in regulated sectors such as finance, healthcare, and utilities.
• Employee Considerations: The treatment of employees can differ. In an asset purchase, employees may need to be transferred to the new entity, which could involve compliance with TUPE (Transfer of Undertakings (Protection of Employment) regulations). In a share purchase, employees remain employed by the same company, and their contracts are generally unaffected.

Conclusion

Choosing between an asset purchase and a share purchase depends on various factors, including the buyer’s objectives, the specific circumstances of the business being acquired, and the potential risks and benefits of each method. Buyers should seek expert advice from financial advisors, legal counsel, and tax professionals to determine the most suitable approach for their acquisition.

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