There are two essential ways that an M&A transaction can be structured: as a share sale or as an asset sale. In a share sale, the buyer takes over the business by purchasing the shares in the relevant company. In an asset sale, the buyer takes ownership of the assets that make up the underlying business.
In this article we take a high-level look at the advantages and disadvantages of both an asset sale and a share sale from the perspective of both buyers and sellers. Please note that this article does not constitute legal or tax advice. Indeed, engaging with expert legal and tax advice prior to proceeding with a transaction is critical.
Share Sale
In a share sale, the existing owners agree to sell their shares in the relevant company to the new buyer. The sellers may agree to sell 100% of their shares or some lower percentage. On completion of the share sale, the buyer takes control of the entity and becomes responsible for all its assets and liabilities.
Buyer
| Advantages |
Disadvantages |
- Avoids disruption to customer relationships with the existing business entity.
- May reduce or avoid the stamp duty payable on the transfer of certain assets.
- Avoids having to assign third-party contracts such as leases and supply agreements, which can be time consuming.
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- Risks taking on unanticipated liabilities and obligations such as tax liabilities, creditors and litigation. This imposes greater due diligence requirements.
- Some third-party contracts may contain ‘change in control’ provisions that require consent to be received.
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Seller
| Advantages |
Disadvantages |
- There may be certain tax advantages, particularly in relation to Capital Gains Tax.
- Agreements with suppliers, employees etc. remain in force. This reduces the risk of suppliers and employees not “coming across.”
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- Due to the heightened risk of unexpected liabilities, buyers may seek to impose more onerous warranties and indemnities on sellers.
- Buyers may insist on withholding a portion of the purchase price beyond settlement to protect against future warranty breaches.
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Asset Sale
In an asset sale, the seller agrees to sell to the buyer the specific assets that make up the business. Typically, this will include items such as plant & equipment, vehicles, inventory and so on. Following settlement, the seller retains ownership of the business entity and remains responsible for all future obligations.
The advantages and disadvantages of an asset sale are in many ways the mirror image of a share sale.
Buyer
| Advantages |
Disadvantages |
- Avoids being exposed to any unanticipated future liabilities after settlement because they remain with the seller.
- Enables the buyer to “cherry pick” the specific assets they wish to purchase.
- Similarly, the buyer is not obligated to take all existing employees across and may be able to negotiate reduced employee entitlements.
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- The potential increased time and cost associated with negotiating the assignment of third-party contracts.
- May increase or crystallise the stamp duty payable on the transfer of certain assets.
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Seller
| Advantages |
Disadvantages |
- The seller should be able to reduce the scope of the indemnities and warranties they are required to commit to.
- Enables the seller to retain any assets they do not wish to include in the transaction.
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- The seller will remain directly liable for all future obligations of the business.
- The seller will need to directly discharge any security interests over the assets being sold.
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Whether a transaction should be structured as either an asset or share sale is a crucial decision. It should be considered as early as possible when preparing to buy or sell a business. It should also always be done on the basis of expert legal and taxation advice.
If you would like to discuss how CFSG can assist you in buying or selling a business, please do not hesitate to contact us.