What is the Difference Between an Asset Sale and a Share Sale?

When selling parts of your business, you can structure the transaction as either an asset sale or a share sale. An asset sale is where you choose some of your company’s assets to sell while maintaining ownership of your business. Whereas a share sale is where you can sell the entire company outright by selling its shares to a buyer. If you are unsure about the difference between a share sale and an asset sale, this article will explain each sale structure and its advantages and disadvantages. 

Asset Sales

In an asset sale, your business will sell some of its assets. An asset is any object that holds value, including:

• land; 
• machinery; 
• cars; 
• IT systems; 
• intellectual property, like trade marks or copyrights; 
• money your business is owed (i.e. trade receivables); and
• the benefit of commercial contracts.

Essentially, you do not lose ownership of your business when you undergo an asset sale. Nor does the buyer gain any ownership interest. Instead, you transfer ownership of your business’ assets to the buyer and receive money or some other form of consideration in return. 

Further Considerations 

In the context of complex transactions, there may be multiple assets your business wishes to sell. For instance, say your company is in the business of patenting and manufacturing special machines. These machines are incredibly complex since they are made up of different components, each with its own patent that your company owns. Additionally, contracts with other manufacturers ensure you deliver five of these machines to each manufacturer. In exchange, the manufacturers guarantee that you will be their sole supplier of these machines for the next five years.

In a potential transaction involving the sale of these machines, there are multiple assets that the seller might want to acquire. These include the:

• machines themselves;
• patents that entitle them to manufacture each of the machine’s components; and 
• benefit of the contracts with the manufacturers that guarantee you will have a steady stream of machine sales. 

In this instance, an asset sale allows a buyer to purchase your business’ machines and their accompanying benefits such as the patents and the contract.

Transferring Liabilities 

Asset sales also allow you to transfer liabilities in a contract. To explain, all contracts contain two elements: obligations and benefits. In this sense, each party will have a set of obligations and a corresponding set of benefits.

In the above example, the contract gives your company the benefit that guarantees the sale of its machines. However, you also must deliver the machines to the other manufacturers. 

If a buyer wishes to acquire the machines, your patents, and the benefits of the contracts, you would probably want to ensure they also acquire the obligation to deliver the machines. In other words, you would also want to transfer the liability under the contract. However, transferring liabilities can diminish the price the buyer is willing to pay. 

Share Sales

Unlike an asset sale, a share sale is where the buyer acquires ownership of the company that carries on business activity. In a share sale, you sell the shares you own in a business to the buyer, effectively making them the company owner. This is done by completing a share-transfer form. A share-transfer form transfers the legal and beneficial ownership in the shares from you, the seller, to the buyer. 

Compared to asset sales, share sales can be more straightforward. This is because the only asset you are transferring is the entirety of the shares themselves. 

Further Considerations

In the machine example above, suppose that delivering these machines is one of your main business activities. You have separate companies which run each of these business activities.  As such, you hold all the shares in each company through a holding company. Say you want to sell the entirety of your machine manufacturing and supply business. Rather than sell each asset (and transfer any corresponding liability), you can just sell the entire company by selling your shares in it to the buyer. 

Advantages and Disadvantages

Before you decide which sale method is right for your business, you should consider the following advantages and disadvantages. 

Asset Sales

Share Sales

Key Takeaways

There are two ways to structure a corporate transaction. You can either choose which of the company’s assets you wish to sell (an asset sale) or sell the entire company outright by selling its shares to the buyer. An asset sale can be more complex, but a share sale will require all the shareholders to approve the transaction. If you need help structuring a corporate transaction, our experienced business sale and purchase 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.

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