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When a buyer decides to acquire a business, they may do this in one of two ways. They can acquire through a share sale or an asset sale. Whether you are a buyer or a seller, it is essential to familiarise yourself with the advantages and disadvantages of both. Ultimately, whether you choose to use a share sale or an asset sale will depend on your business preferences.
This article will explain some of the key differences to help you understand both a share sale and an asset sale.
What is a Share Sale?
A share sale is where the buyer will acquire enough shares in the business to become the new owner. This occurs through a share purchase agreement (sometimes known as a stock transfer form) for a majority of the company’s shares.
By taking enough of the shares to become an owner, the new owner will also inherit all of the business’s assets, liabilities, and obligations. The assets of the company will include both tangible assets and intangible assets.
In other words, by acquiring through a share sale, the business will run as usual but with a new owner.
Pros and Cons of a Share Sale
A share sale allows the seller to have a clean break from the business. Because the buyer takes on all assets and liabilities, the seller usually does not remain connected to the business after the transaction is concluded. In this way, a share sale can be a discreet way of selling the business. Your employees may not even realise that the business has changed ownership.
A buyer, however, might look to mitigate risk by asking the seller to agree to certain indemnities and warranties as conditions of the sale. Alternatively, they may also try to negotiate a discount on the price of the shares to reflect some risks that they may be taking on. Those risks may include market volatility, for example, as well as the value of your shares. Because of this, a share sale might lead to your business being valued for less than the total sum of its assets. However, a share sale has historically been more tax-efficient than an asset sale.
Finally, a share sale will usually be a lengthy process. Depending on the size of the company issuing shares, the’ due diligence’ phase can take a while. Due diligence refers to the process of researching the business and learning all relevant information.
What is an Asset Sale?
In an asset sale, the buyer acquires only the business’s assets. Like a share sale, this will include both tangible and intangible assets.
Unlike a share sale, an asset sale does not necessitate a change of ownership. The business can continue to run as it did before, but with new owners of some assets.
Pros and Cons of an Asset Sale
An asset sale allows the seller to retain parts of the business they want to keep for themselves. Because of this, the seller is not entirely unconnected to the business after the transaction is completed. This may be preferable to the seller, depending on the specific details of the business being sold. For example, the seller may wish to retain some of the assets to sell to another seller later.
An asset sale generally involves fewer risks than a share sale. As a result, the price of the assets is less likely to be discounted to mitigate against risk. Similarly, the seller may not have to enter into multiple burdensome indemnities and warranties with the buyer. In addition, if the seller does give warranties and indemnities, those warranties are issued in the company’s name rather than the individual seller. This is always useful as it limits personal liability.
Alongside this, the due diligence phase of an asset sale is usually less lengthy than that of a share sale.
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Key Takeaways
A share sale and an asset sale both have pros and cons. Whichever one you prefer to use will largely depend on what you are looking for out of the sale. It is advised that you seek legal advice to ensure that your properties have been transferred correctly. Failure to stick to formalities can create complicated situations relating to equitable rights, which may be a problem if you find yourself in a dispute.
If you need help with buying or selling a business, LegalVision’s business sale and purchase 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.
Frequently Asked Questions
Not necessarily. The owner of a company is usually the individual (or group) with a controlling amount of shares. This might be around 50% of the shares. However, it may be around 90% of the shares. It depends entirely on the details of your business. It is recommended that you seek professional legal advice before deciding how to sell or raise money for your business.
An asset sale generally involves fewer risks than a share sale, and the due diligence phase is usually less lengthy.
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