Share sale or asset sale? Which is best for your business?
If you are looking to sell your business in the UK, there are two main structures this transaction can take: a share sale or an asset sale.
Each transaction structure has its own advantages and disadvantages and, as such, will result in different outcomes for both the buyer and seller. Selecting the right type of transaction for your business will also impact on your tax liabilities, so working closely with your legal team, in addition to your accountants and tax advisers, is the best approach to ensure both an expedient and tax-efficient sale.
Before we begin, it should be noted that this article applies to businesses owned by a limited company, as opposed to a sole trader or partnership, for whom an asset sale is usually the only option.
Share sales versus asset sales – what is the difference?
In an asset sale, the buyer is purchasing some or all of a company’s assets. These can include tangible assets such as machinery, equipment, land, premises, stock and inventory, as well as intangible assets such as intellectual property, contracts and even the company’s brand and reputation. An asset sale, therefore, will allow the buyer to ‘cherry pick’ the assets and liabilities they wish to take on, leaving the remainder (and ownership of the company itself) with the seller.
Sellers who wish to sell their company in its entirety, however, will usually opt for a share sale. This involves the company’s shareholders selling their shares in an incorporated company (which, as a separate legal entity, owns the business) to the buyer. As the company (rather than the shareholders themselves) holds all the business’s assets, liabilities, rights and obligations, a share sale will mean that these all stay within the target company, the only change being the ownership of that company. Business obligations and liabilities include overheads, salaries, money owed to creditors, loans and mortgage payments, or even contingent liabilities such as future lawsuit damages. As such, a share sale is often described as the buyer acquiring the company ‘warts and all’.
Tax considerations for sellers
Share sales and asset sales are taxed differently, resulting in different outcomes for the seller.
Share sales are usually more tax-efficient for sellers, as individuals disposing of shares in the UK only pay capital gains tax (CGT) on gains from the sale. Furthermore, shareholders may be eligible for Business Asset Disposal Relief (BADR) – formerly known as Entrepreneurs’ Relief – on the sale profits. Should you qualify, this relief allows shareholders to benefit from a reduced rate of CGT of 10% rather than 20%, up to a lifetime allowance of £1 million. Note that different rates of CGT can apply and tax advice should always be sought.
If, on the other hand, you are selling your business assets, you may be subject to a double tax charge: firstly, the company will pay corporation tax on chargeable gains at the current prevailing rate of 19%, and secondly the shareholders will have to pay tax on extracting the sale proceeds from their company, which is often achieved through payment of dividends or else through a liquidation of the company to return capital to its shareholders.
Advantages of share sales
- Often the preferred option for sellers, as the company is transferred to the buyer in its entirety.
- Usually less disruptive than an asset sale and allows business to continue as usual – for example, employees will see no change to their employment rights or contract terms because their contracts remain with the same company and there will be no need to assign commercial premises.
- Allows the seller to divest themselves of all liabilities relating to the company – this is good for sellers looking for a ‘clean break’.
- Usually more tax-efficient from the seller’s perspective.
Disadvantages of share sales
- As they are taking on the business and all its liabilities, buyers are likely to conduct extensive due diligence prior to purchase and insist on a number of warranties and indemnities from the seller to protect them from any risk that may be incurred, all of which can delay the transaction or even cause it to collapse.
- As such, share sales can be more drawn out and expensive due to the additional paperwork and extensive negotiations involved.
Advantages of asset sales
- Sellers may have more negotiating power when selling assets, as this transaction structure is mostly what buyers prefer. As the seller will often maintain responsibility for the company’s liabilities, they may be able to command a higher price for its assets.
- Fewer liabilities usually mean less due diligence from the buyer – and therefore a quicker sale.
- The seller can choose which assets will be sold and which will be retained in an asset sale.
Disadvantages of asset sales
- They can be less tax-efficient and result in a double tax charge.
- Asset sales can be restrictive – for example the sale of customer data may be protected by data protection law, while assets like licenses and social media accounts are often untransferable.
- Asset sales often rely on the cooperation of third parties such as landlords and suppliers (who must consent to the transfer of leases and contracts) – a lack of cooperation can result in a delayed transaction or even the deal falling through.
- Transferring employees from seller to buyer is more complex under asset sales, as the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will come into effect. Both seller and buyer must be aware of their obligations under the regulations; failure to do so may result in severe financial penalties.
So, which is best for my business?
Whilst, broadly speaking, a share sale is often simpler for sellers and an asset sale preferable to buyers, there is no general ‘best’ structure when it comes to selling your business.
The right transactional structure will depend on your personal objectives, your business’s individual circumstances and the wishes and objectives of other shareholders or parties involved in the transaction. For example, if you are a seller who specifically wishes to retain ownership of certain business assets, then an asset sale is likely to be preferable.
Deciding between a share sale or an asset sale is a critical decision for any business owner and should therefore be made with the support of a specialist team with the expertise to advise on the best way forward for you and your business.
To discuss your needs or for more information about any of the points explored in this article, please don’t hesitate to get in touch with the Head of our Corporate, Company & Commercial department, Mark Stigwood, on 0203 871 0022, or email him at email@example.com.