This article was originally published in London Business Matters magazine.
In sectors which see a significant number of sales and acquisitions, there are generally two primary methods: asset sales and share sales. While both avenues aim to achieve similar outcomes of transferring ownership in the underlying business, they vary significantly in their structure, implications, and legal considerations.
In an asset sale, the Buyer purchases specific assets and liabilities of the target company rather than acquiring its shares. These assets can encompass tangible properties such as real estate, equipment, inventory, and intangible assets like intellectual property or goodwill. The transaction typically involves negotiating individual asset values and liabilities, which allows for greater flexibility in tailoring the deal to suit the Buyer’s needs because it can, to an extent, ‘cherry pick’ assets and liabilities which will transfer.
On the other hand, a share sale involves the purchase of the target company’s shares, thereby acquiring ownership of the entire business entity, including all its assets, liabilities, contracts, and obligations. From the Buyer’s perspective, this approach offers simplicity and comprehensive control over the acquired entity but entails assuming all existing legal and financial commitments.
Advantages of Asset Sale:
Selective Acquisition: Buyers have the freedom to cherry-pick assets and liabilities, enabling them to acquire only desirable components while excluding liabilities or assets deemed unfavourable.
Risk Mitigation: By acquiring assets rather than shares, Buyers can often limit their exposure to unknown or contingent liabilities, reducing the risk inherent in the transaction.
Tax Benefits: Asset sales can offer potential tax advantages for both the Buyer and the seller, such as the ability to depreciate acquired assets or offset gains against losses.
Operational Control: Buyers gain direct ownership and control over specific assets, allowing for seamless integration into their existing operations or strategic expansion plans.
Advantages of Share Sale:
Simplified Acquisition: Share sales streamline the acquisition process by transferring ownership of the entire business entity, eliminating the need to negotiate individual asset values and liabilities.
Continuity of Operations: As the Buyer inherits the target company’s legal entity, contracts, and relationships, business operations can continue without interruption, ensuring seamless transition for employees, customers, and suppliers.
Preservation of Brand and Reputation: Maintaining the target company’s identity and reputation can be easier in a share sale, as there is no disruption to branding or customer relationships. Customers in the hospitality & leisure sector often affiliate strongly with a brand so this can be beneficial to a Buyer.
Tax: A key commercial driver for structuring the acquisition as a share sale is tax. Sellers may be entitled to certain reliefs and the consideration will be paid directly to shareholders of the target company. Conversely, on an asset sale the consideration will be paid to the target company itself, which often results in a lengthier process requiring distribution of the cash or a winding up of the target company post completion. Additionally, on a share sale no stamp duty land tax will be incurred because the properties remain with the target company. In contrast, on an asset sale the properties e.g. pubs or hotels which often carry a significant proportion of the value of the business will be transferred and the Buyer will need to pay stamp duty land tax. The Buyer will pay stamp duty on the purchase of shares at a rate of 0.05% (subject to certain thresholds) which is generally significantly lower than stamp duty land tax if the transaction was carried out as an asset purchase.
Understanding the nuances between these two approaches is crucial for stakeholders navigating the complex landscape of business transactions. Thorough due diligence, thoughtful negotiation, and strategic planning are essential for navigating any transaction successfully. Engaging lawyers as well as financial and tax advisors early on will help to make sure the best option is chosen for both parties.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at July 2024.