29 November 2023 by Timothy Lucas

Helping you choose a share sale or asset sale

When you’ve built up your business and the time has come to sell, there are broadly two ways to do it – a share sale or an asset sale.

What are you selling?

 As the name suggests, in a share sale, you will be selling the shares in your company.  Only the ownership of the shares will change.  Any assets, property or contracts belonging to the company will not change hands.

In an asset sale, the company itself will be selling its business and assets.  This will involve individually transferring to the buyer any leases, real property, intellectual property, employees and contracts. Essentially, the buyer can pick and choose which assets they want (subject to some limitations, such as employees, who are transferred under the TUPE Regulations – please contact us to discuss further). Some licences and consents cannot be transferred and must be newly applied for by the buyer – you may need to check with the body that issues the licence or consent.

What is the process for contracts?

For the purposes of a share sale, any contracts in the company’s name (whether they are with customers, suppliers or other parties) will remain with the company.  However, it is crucial to keep an eye out for ‘change of control’ provisions in the contracts – especially when going through the due diligence process.  Such provisions may entitle the other party to the contract to terminate the contract when the shares are sold.

In asset sales, the contracts moving from the selling company to the buyer will usually need to be either ‘assigned’ or ‘novated’. Novation is a contractual process by which the buyer will take up the rights and obligations of the seller.  In order to do this, all three parties (i.e. the buyer, the seller, and the other party to the contract) will need to agree.

Do we need to carry out due diligence?

Yes! Due diligence is very much a part of both processes.  However, there are a few differences depending on the deal structure.  In an asset sale, the due diligence is often limited to the assets that the buyer is looking to purchase. This is unlike a share sale, where the process must inherently be more detailed, as the buyer will inherit all the company’s liabilities.

A bit on liabilities…

In the event of an asset sale, the debts and liabilities of the selling company will generally remain with that company.  Therefore, unless the parties agree otherwise, the buyer does not take on responsibility for paying them.  In a share sale, as it is the company that is being transferred, the buyer indirectly inherits the debts and liabilities of the target company.  As a result, negotiations of the sale price usually take into account any debts payable by the target company.  In some circumstances – most commonly in relation to the tax liabilities of the target company – the seller will provide the buyer with an indemnity for any liabilities that arise after the deal is done but which are linked to the period when the seller was still in control.

Tax consequences

The two approaches may have significantly different tax consequences – and this is often one of the main drivers in deciding how to structure a deal.  As part of the planning process, it’s crucial that you take appropriate tax advice.

If you have any questions relating to potential deal structures, or if the time has come to sell, please contact our Corporate & Commercial team.

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