Selling your business: share sale or asset sale?
Deciding to sell your business can be a difficult and momentous decision. How the sale will be structured is a matter for negotiation between the seller and the buyer.
Here we look at the key legal factors from a seller’s perspective of an asset sale versus a share sale.
WHAT IS THE DIFFERENCE?
- Share sale involves the sale of all of the shares in the company that owns and operates the business.
- Business or asset sale involves the sale of the specific assets that make up the business.
WHAT IS FOR SALE?
If you are planning on selling only a division of your business, it may be more practical to structure the transaction as an asset purchase. Otherwise, it will be necessary first to set up a new company and transfer (or ‘hive off ’) the relevant division to the newly formed company, following which the shares in that company can be acquired by the buyer.
LIABILITIES
If you sell the company by share sale, all of the liabilities of the business remain with the company and your post-sale liability will usually be limited to the warranties and indemnities you give to the buyer.
If the asset sale route is chosen and the liabilities of the business are not specifically transferred to the buyer, they then remain with the company, meaning that ultimately you will have to deal with them.
TAX
Before deciding whether to go down the share sale or asset sale route, it is important to obtain tax advice, as tax will often be the main driver in deciding the structure.
The base cost of the shares or assets and the tax efficiency of who receives the consideration (you or your company) are tax factors for you as seller. The main buyer tax is stamp duty – which is 1% on shares or 2% on most assets.
EMPLOYEES
In a share sale, the employees continue to be employed by the company being sold and their status remains unchanged. In an asset sale, the new owner is legally obliged to take on the seller’s employees on identical terms and conditions.
The seller and buyer are also obliged to notify or consult with employees in connection with the proposed transfer, normally 30 days before the transfer is carried out. It is very difficult to make an employee redundant as part of a transfer, as it will normally constitute an unfair dismissal.
KEY DOCUMENTATION
The most important documents are the Share Sale and Purchase Agreement (in a share sale) or the Asset Sale and Purchase Agreement (in an asset transaction), with the warranties and indemnities within them being a key focus for a seller.
