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Selling your Business: Sale Structures
If you own a company and want to sell your business there are two main sale structures.
The first of the two main sale structures is an asset sale. This is where a company can sell its business and assets. The second is a share sale and this is when shareholders can sell their shares in the company.
Asset Sale Structure
An asset sale structure offers the buyer more control to specify which assets are being acquired and this enables the buyer to “cherry pick” those assets and liabilities that it wishes to acquire. An asset sale is therefore a useful structure if there are potential significant, un-quantifiable liabilities (for example in respect of litigation) which the buyer wants to clearly exclude from the sale. An asset sale also offers a seller the ability to sell off a defined element of its business or exclude it from the sale by agreement.
It is important to bear in mind that in an asset sale the owner of the assets changes, whilst in a share sale it is the owner of the company carrying on the business that changes. In an asset sale there may be assets for which third party consent to the transfer is required. The transfer of certain assets may also require certain registration requirements.
From a Seller’s perspective the pros and cons of an asset sale are usefully summarised below:
Pros of an Asset Sale
- An asset sale is generally a more straightforward transaction.
- The seller is your company and so any warranties or guarantees you give are given by your company, not you personally. Unless there is an express arrangement to the contrary (which is likely!).
- You can retain parts of the business of value to you.
Cons of an Asset Sale
- It is generally not as tax-efficient for the seller as a share sale.
- The sale may be logistically more complex than a share sale. You will need to ensure that all the different parts of the business are legally transferred including any properties, employees or contracts. This may involve quite a bit of work on your part.
- The buyer may ‘cherry-pick’ the assets they wish to acquire.
- The company will still be yours at the end of the transaction and you will need to deal with this properly e.g. by winding the company up (if appropriate) and paying all existing liabilities and debts and disposing of the retained assets before taking the net cash proceeds.
Share Sale Structure
In a share sale structure (assuming it is an acquisition of the entire issued share capital of a company) the buyer acquires the company. The buyer acquires the company with all its assets, liabilities, rights and obligations. This is sometimes referred to as acquiring the company “warts and all”. The benefit of this is that the buyer can be relatively certain that it is receiving all of the assets necessary to carry on the business and the seller can be relatively sure that it is ridding itself of its liabilities. Albeit the seller is likely to retain some financial exposure as a result of giving warranties in the share purchase agreement. For this reason, buyers in share sales often focus more carefully on due diligence than in asset sales to avoid unpleasant surprises once they have acquired the shares The pros and cons of a share sale from a seller’s perspective are usefully summarised below: –
Pros of a Share Sale
- A share sale is often simpler for the seller than an asset sale as the company is sold as a ‘going concern’ in totality.
- It is a more discreet sale as the business will carry on as usual after the sale.
- The buyer of shares buys a company ‘warts and all’, so will inherit any problems that exist at the date of the sale.
- It is usually more tax-efficient for the seller than an asset sale.
- There is no TUPE transfer of the employees as the company remains their employer.
Cons of a Share Sale
- A share sale involves a greater risk for the buyer than an asset sale because of the level of liabilities the buyer may be exposed to. For this reason, the buyer will therefore, expect the seller to give extensive warranties and indemnities as protection against unknown liabilities.
- A buyer may require a price reduction or retention to reflect this increased risk.
You should take legal and taxation advice to establish the most suitable structure for you before agreeing the terms of the transaction. The legal and tax implications of an asset sale are different from a share sale and it is important to consider your options carefully. Sellers often prefer a share sale, while buyers often prefer an asset sale.
The way in which a sale is structured is often the subject of negotiation between the parties and should be agreed upon at the outset of the transaction.
For more information on how WSP Solicitors can help you with buying or selling a business please visit here. You can contact WSP Solicitors directly here. Alternatively, you can call us on 01453 847200