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If you are looking to sell part or all of your business, you may know that you can structure the business sale either as a share sale or an asset sale. Each kind of structure has its advantages and disadvantages. Nevertheless, a share sale is where you sell the shares in your company to another person. Subsequently, the buyer will become the new owner of the company. This article will summarise the key features of a share sale and then explain how your business might benefit from a share sale.
What is a Share Sale?
A share sale is one of the two main ways you can structure the disposal of a limited company. As the name suggests, you are effectively selling the shares in your company to another person who will become the new owner.
This is distinct from an asset sale, where you sell a company’s individual assets to a buyer. Examples of asset sales include selling land, machinery, and intellectual property rights. When taken together, the sale of the assets becomes a substantial disposal of the company’s business.
Structuring a Share Sale
Only the owners of a limited company can sell a business through a share sale. This is because company shares are the medium of exchange in the transaction. That is to say, you cannot structure your business disposal through a share sale if you operate through any other business structure.
The share sale proceeds will go to the person who has sold the company shares. If you own these shares, the buyer pays you the money directly. If you are selling a subsidiary company, the proceeds of the sale will go to the person that owned the shares.
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Advantages of a Share Sale
There are various advantages to disposing of a business via a share sale.
A Clean Break
As the company’s owner, you lose all connections with the company once you transfer the shares to the buyer. While the company must observe any obligations it owes to third parties, you will not have any responsibility to ensure these obligations are met. Instead, the buyer will indirectly assume these liabilities. In this sense, you can dust your hands clean from the business and walk away.
Simplicity
A share sale is relatively straightforward from a legal perspective. This is because the only thing changing hands is the shares themselves. Otherwise, everything else including the business remains as it was. Therefore, the transaction is usually much quicker than an asset sale.
Taxation
The law surrounding tax and business transactions is quite complex. However, share sales are more straightforward than asset sales when assessing what (if any) tax liabilities you will owe HM Revenue & Customs after the sale.
Any money you or a group company receives from a share transfer is subject to capital gains tax. This is a relatively straightforward tax, so you will not be hit by any unexpected tax liabilities.
Additionally, provided you sold the shares, you will not have to pay any capital gains tax if you reinvest the proceeds from the share sale into a qualifying company under the Enterprise Investment Scheme.
Disadvantages of a Share Sale
A share sale has a few disadvantages from your perspective as the seller. This is because, in practice, the buyer will want to bind you to your company’s liabilities long after the sale rather than inherit all of the obligations themselves.
Due Diligence
Following a share sale, a buyer must manage the business’ liabilities. Hence, a buyer will have a strong interest in uncovering any existing or potential liabilities in your business. To do this, the buyer will conduct due diligence into your company’s affairs.
Due diligence allows a buyer to better understand your business’s financial and operational position. Since the stakes are quite high from the buyer’s perspective, due diligence is often a lengthy process in a share sale transaction.
Warranties and Representations
A buyer will also want to maximise their ability to claim against you if something later emerges that affects the company’s value. To do this, the buyer will usually want you to make certain representations about the state of your company in the sale agreement. If the buyer finds out that these representations are false, they have a legal claim against you.
The buyer will also want you to make specific promises that things you say are correct. For example, you might promise or warrant that you will keep your business’ equipment in good working condition before the sale completes. If you do not keep your promise, the buyer can claim against you to reimburse themselves.
Key Takeaways
Share sales are one of two main ways a seller can dispose of a company. The principal benefit of a share acquisition from the seller’s perspective is that the seller has no obligation to the company other than those it agrees to as part of the contract of sale. Any liabilities the company owes to third parties become the buyer’s indirect responsibility. Additionally, share sales are relatively straightforward transactions and require less legal documentation to complete the transaction compared to an asset sale.
If you need help selling your business, our experienced business sale lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Share acquisitions are more straightforward transactions because the only thing that changes hands is the shares in the target company itself. This means that there is less legal paperwork involved. As a seller, you also benefit from bearing no responsibility for the company after you transfer the shares, except for any contractual agreements in the share purchase agreement.
The buyer will likely ask you to agree to specific terms that keep you ‘on the hook’. For example, the buyer usually wants you to make certain representations about your company’s financial position. If the buyer finds out that these representations are false, they have a legal claim against you.
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