Summary
- Businesses selling part or all of their operations can structure the transaction as either an asset sale or a share sale, each carrying distinct legal, tax, and operational implications.
- In an asset sale, the seller transfers specific assets and potentially associated liabilities, whilst retaining ownership of the company itself; in a share sale, the buyer acquires the entire company by purchasing its shares.
- Share sales are generally simpler to document but require shareholder approval, whereas asset sales offer greater flexibility but can involve more complex documentation and tax considerations.
- This article is a plain-English guide to asset sales and share sales for Australian business owners, covering the key differences, advantages, and disadvantages of each structure under Australian law.
- The content is produced by LegalVision, a commercial law firm that specialises in advising clients on business sales and corporate transactions.
Tips for Businesses
When choosing between an asset sale and a share sale, identify which liabilities you want to retain or transfer before negotiating terms. Confirm whether shareholder approval is required early in the process. Ensure all contracts, patents, and receivables are clearly listed if proceeding with an asset sale to avoid disputes over scope.
When selling part or all of your business, you must choose between two structures: an asset sale or a share sale. Each carries distinct legal and commercial implications that can significantly affect the outcome of your transaction. 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.
Buying a business? Download this free guide to help you negotiate key terms like price, stock, and employee entitlements.
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.
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Advantages and Disadvantages
Before you decide which sale method is right for your business, you should consider the following advantages and disadvantages.
Asset Sales
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Share Sales
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Advantages |
Disadvantages |
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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.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced business sale and purchase lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
An asset sale is a corporate transaction where a company sells specific assets to a buyer rather than transferring ownership of the entire company.
A share sale is where shareholders sell their shares to a buyer in exchange for cash. As a result, the buyer acquires ownership of the business.
A share sale is generally simpler, as you only transfer the shares themselves rather than documenting multiple individual assets.
Yes, all shareholders must approve the transaction, and any shareholder can refuse and halt the sale.
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