I’m Looking to Buy a Business in England. Is a Share Purchase Right for Me?

When looking to buy a business, it is fundamental to negotiate how you and the current business owner (the seller) will structure the transaction. The two main structures for business purchases are share purchases or asset purchases. Importantly, you can only structure a business purchase as a share purchase if the business trades through a company. This is because only companies have share capital. 

Therefore, this article is not for potential buyers of partnerships or sole trader business structures. We will only consider purchasing companies (or a group of companies). First, we will explain the legal basis for share purchases and then consider the advantages and disadvantages of a share purchase.

Business Purchase vs Share Purchase

A company is considered its own legal entity — also called a body corporate or simply incorporated. As such, it can own property and enter into contracts with others in its own name.

So, when looking to purchase a business, the company will own all of the business assets, not the business owners (i.e. shareholders). Therefore, as a buyer, you have two options:

• purchase all the relevant business assets directly from the company (an asset purchase); or 
• purchase the shares from the shareholders. 

Share Purchases for Businesses Structured Through a Group of Companies 

A business might spread itself across several different companies, which is quite common for larger businesses. 

Typically, these companies will all be owned by a single parent company. That is, the parent company will own, directly or indirectly, the shares in all of the subsidiary companies. Therefore, assuming you wanted to acquire the entire business, you would need to buy the shares in the parent company. 

Advantages to Share Purchases

A share purchase is technically and conceptually easier to execute than an asset purchase. This is because the only thing that changes hands is the shares in the company itself. Accordingly, you only need the seller to lawfully sell the shares to the buyer to complete the share sale. 

Disadvantages to Share Purchases 

When you buy a business through a share purchase, you take the good (the assets) with the bad (its liabilities). 

So, any claim against the business, such as a lawsuit or loan, is a claim against the company itself. This claim is not discharged if the shares change hands. In effect, the buyer, as the new owner, indirectly assumes both the business’ benefits and liabilities. 

An Example

Suppose a business has a strong reputation in manufacturing special widgets. The business is incorporated as a group of companies. It owns: 

• machines that it develops to make the widgets; 
• the patent rights to the machines and the widgets; 
• goodwill, which is its well-placed position in the market; and
• the rights to its brand, which it leases to third parties. 

However, several companies in the group are party to an expensive lawsuit. Additionally, a small division that manufactures plastics is unprofitable and will likely remain so. 

Commercial Considerations 

When acquiring a business structured through a company, your negotiations with the seller are critical. It is almost always in the seller’s interest to negotiate a share purchase (or share sale, from their perspective). As mentioned above, any liabilities inherent to the business will stay with the company when the shares change hands. As such, the seller gets a clean break from the business, while the new owner (you) indirectly assumes both the benefits (profit) and any liabilities, whether known or unknown. 

Therefore, if other potential buyers are courting the seller, they may be in a negotiating position to demand that its business be sold as a share sale. You would then have to determine if the underlying business is worth its liabilities. 

On the other hand, if you are buying a distressed business with few willing buyers, the seller may appreciate that it will need to keep all the liabilities and cumbersome assets. They might agree to transfer you the valuable assets. In this case, you avoid a share purchase. 

Buyer’s Due Diligence 

Due diligence is the process the buyer undertakes to investigate the business’ obligations and liabilities. Since the liabilities automatically transfer to the buyer in a share purchase, the buyer usually needs to conduct a more thorough due diligence. That is why, practically speaking, even though it is relatively easy to transfer shares, share purchases can lead to longer transaction times compared to asset shares. As a buyer, you will be more exposed if you fail to identify a hidden liability. Consequently, it is essential that you spend more time researching the company.

Key Takeaways 

As a buyer, you will usually stand to benefit from buying a business through an asset purchase rather than a share purchase. This is because a share purchase effectively purchases the company (or group of companies) through which the business trades. Since liabilities attach to the company, these move with the company if it changes ownership. However, the seller may be in a stronger position than you. At this point, a share purchase may be your only feasible option to acquire the business. 

If you need help with your business purchase, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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