Asset Sale vs Share Sale: Which is Right for Your Business

Introduction

If you choose to purchase or sell a business, one of the most important decisions you will need to make is whether you proceed with an asset sale or a share sale.

While both avenues achieve the same goal of transferring ownership of a business, the terms involved in these arrangements vary and there are different tax, liability and legal considerations that apply.

Understanding the difference between an asset sale and a share sale is essential for choosing the most suitable approach for your circumstances.

This article explores the differences between asset and share sales to help you navigate the complexities of these transactions.

Asset Sale

An asset sale occurs when a business sells its assets to a third party. The assets sold can include tangible assets (e.g. equipment and stock) and intangible assets (e.g. intellectual property and customer lists).

In selling only the assets of the business, the seller retains the legal entity of the business, and the buyer acquires the assets of the business. An asset sale typically offers greater flexibility, as buyers and sellers can negotiate which assets are included in the sale – whether that be a portion of the assets or the entire business.

For a buyer, an asset sale may be desirable since they acquire only the assets. This means that any liabilities not explicitly assumed with the assets remain with the seller. For the buyer, this is advantageous as there is no risk of inheriting any unknown liabilities associated with the business.

However, asset sales can be complex for both buyers and sellers. The complexities of an asset sale include asset valuation, the transfer of individual assets (which may require third-party consents) and tax implications for both parties. If proceeding with an asset sale, we recommend seeking advice from your accountant regarding the relevant tax implications.

Share Sale

In comparison to an asset sale, a share sale is a transaction where a buyer acquires the shares of a company, taking ownership of the entire business entity (if 100% of the shares are purchased).

By purchasing the shares of a company, you will gain control over all its assets, liabilities, contracts and operations.

Share sales are often preferred by sellers, as they provide a clean exit from the business with ownership transferring to the buyer and fewer post-sale obligations. It can also be a much simpler process in terms of admin for sellers as a share sale removes the requirement for individual asset assignments.

Sellers should consult their accountant to determine whether a share sale is suitable, particularly if capital gains tax concessions apply. This is not accounting advice, and we recommend speaking to your accountant about this.

Buyers may also prefer a share sale as it allows them to acquire a business as a whole, including its established goodwill, customer relationships and market position.

However, share sales carry risks for buyers, as they assume all existing liabilities, including pending litigation and tax obligations. Some of these risks can be mitigated by conducting due diligence to assess the business’ liabilities. More information about due diligence can be found here.

Conclusion

Choosing between an asset sale and a share sale is a critical decision that should be guided by professional legal and financial advice.

Asset sales can give buyers more control over what they acquire, which makes it a preferred option for those buyers looking to minimise risk. However, share sales provide a seamless transition and may offer tax advantages.

Both buyers and sellers should carefully assess their objectives, risk tolerance and financial implications before deciding on the most suitable transaction structure. Legal, financial and tax advice is essential to ensure the chosen approach aligns with your business goals and provides the best outcome.

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