Selling Your Business – Should you agree to an Asset Sale or Share Sale?

Seller’s Position

Buyer’s Position

Better Bargaining Power: Usually Sellers have better bargaining power due to Buyers’ general preference to buy assets. Opportunity for Sellers to negotiate an improved net benefit.

Due Diligence: This is usually more straightforward than a Company sale as the Buyer is taking over assets only. There is less of a need to know what is going on elsewhere with the Seller (being a Company).

Assets need to be scrutinised, investigated and checked, in order to understand the real value of what is being purchased, but Buyers don’t generally need to worry about other liabilities arising post-sale (unless they are tied to those specific assets). For example, any tax liabilities, employee issues or past consumer complaints and actions. The Buyer is responsible for those types of issues only where they arise post-sale.

Post-Sale Costs: Sellers remain responsible for cost of clearing liabilities, tidying up post sale and potentially winding down the company which owned the assets.

Asset Selection: Sellers choose which of the company assets will be sold and which will be retained. For example, in the sale of a restaurant, the owner may want to sell the fixtures, fittings, kitchen equipment and utensils, but may have other outlets and may therefore want to retain the customer database, in addition to the IP, trading name, IT and software.

Customer Retention: Where customers are signed up to recurring or automated payments, such as with an online retail business, they will need to make changes to their payment details to switch to the Buyer's company. Those who do not do so may be lost forever.

Seller Tax Considerations: Where the Seller sells assets at a loss he can (generally) use those losses against gains made elsewhere in his business.

There is a potential for the Seller to be taxed twice. If the business sells assets at a gain it will have to pay tax on those profits made. But when those profits are distributed to the shareholder/s (usually via dividends), it is taxed again!

Tax calculations on Assets can be quite complex as different categories of assets may have to be treated differently for tax purposes. If on a capital asset the Seller has claimed capital allowances, and then sold the asset for more than the book value, he may be liable to a "balancing" charge.

Please discuss taxes with your accountant.

Buyer Tax Advantages: Whilst we cannot advise on Tax, you should ask your accountant or tax adviser about purchasing assets, applying a value and whether depreciation can be claimed.

In addition acquiring assets and selling them for a lower price than what was paid incurs a trading loss that can (generally) be set against his other profits to reduce tax. The same is true for losses on capital assets (if capital allowances haven't already been claimed on them). Amortisation relief was scrapped stopped in 2015 so that when a Buyer pays for goodwill they cannot gain a tax advantage by writing off or amortising that goodwill against future profits.

Amortisation is, however, still available on some intangible intellectual property assets including know how, patents and trademarks). There may also be VAT to be paid on the purchase (unless the transaction qualifies as a "transfer of a business as a going concern".

Please discuss taxes with your accountant.

Social Media: Due to issues with transferability of accounts, a Seller may be forced to retain assets such as social media accounts as social media platforms often do not allow account transfers from one party to another. (Under a share sale social media assets / accounts would transfer.)

Company and Shareholder Issues: Where there are differences of opinion on whether to sell company shares or where there are transfer restrictions which limit any shareholders’ ability to sell their shares in the Company Articles of Association and/or the Shareholder Agreement, a sale of the company's assets is sometimes used as a way around these restrictions. Please note that there may still be restrictions in those documents as to the value of assets which can be sold without full shareholder approval and it is common to have a clause limiting the ability of the company to sell all of its assets without full shareholder approval. In these types of situations, it is vital that full legal advice is taken in advance of the transfer.

TUPE and Employees: Buying the assets of a business often triggers TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006) due to the employees, or some of them, having to remain with the business and transferring across to the Buyer with the assets. The Buyer will thereafter be responsible for taking on all the employees of the business on the same terms they enjoyed before. Whether or not TUPE applies in any individual case is a matter for the Buyer's legal advisers to consider and this will involve Seller input due to statutory notifications required prior to the transfer. If TUPE does apply that can be a considerable liability for the Buyer to take on.

Speed: Put simply, less Due Diligence for the Buyer to perform in an asset sale, the transaction can often be completed more quickly.

Loss of Key Contracts: Suppliers, business support, banks and other similar arrangements do not transfer with the assets and remain with the Seller. These will need to be renewed or refreshed. 

Third parties: Approval of the transaction is sometimes required by third parties, such as landlords (see below) and this can often prove problematic and delay or even end the discussions and the deal altogether.

Individual Asset Transfers: Where there are a number of different routes to securing title, this can be time consuming and more expensive. For example, the transfer of a licence works differently to the transfer of a property or intellectual property.

Property and Lease Concerns: A Landlord’s consent is most often required when the assets of a business are being transferred. The reason for this is because responsibility for the unit, retail or office, will need to be transferred across to the new owner of those property assets. As the lease was in the name of the Seller (who will no longer be involved), the Landlord needs to be informed as this will affect the property and the covenant of the lease (a Landlord has the right to know who is living in or operating from its property. Consent can prove difficult when it comes to transferring the lease to a new owner. Landlord lawyers may require the Buyer to pay large deposits, provide personal guarantees, even agree to a higher rent, which can all contribute to slowing down the sale. This is a necessary, but often a slightly difficult and even an irritating step to the parties themselves who are forced to work with a third party on the asset purchase transaction.

Personal Data: Seller’s customer list and client information - and all the information retained about those customers and clients (addresses, order history etc.) is owned by the Seller and the Seller can't sell that data to a Buyer, for the simple reason that it does not actually “own” the data.

That data resides with the Seller and transfers to a Buyer only if either the customers consent to the transfer of the data to the Buyer or if the Buyer purchases the entire company. If clients do not consent to their data being transferred then the data remains with the Seller until either the data subject requires its deletion or until the period for lawful retention of data expires.

Valuation: The value in some assets may be lost altogether. Assets like permits and licences often cannot be transferred to the Buyer and any investment made in developing those assets will be lost.

More recently, we encountered a situation where certain online listings such as Google and Trustpilot Reviews were incapable of being transferred or had limited post-completion value.

Employees and TUPE: It is important to understand that Employees do not automatically transfer from a Seller to a Buyer and that a process needs to be followed through which Employees have the right to “object” to their transfer to the Buyer. This is a statutory process which needs to begin in advance of completion, when notifications are required to be sent to Employees.

This area is a heavily regulated area and specialist Employment Law advice ought to be taken.

Personal data: ​Seller’s customer list - and all the information retained about customers (addresses, order history etc.) is owned by the Seller and the Seller can't sell that data to a Buyer, for this simple reason that it does not “own” the data. That data resides with the Seller and transfers to a Buyer only if either the customers consent to the transfer of the data to the Buyer or if the Buyer purchases the entire company.

Warranties: The Buyer's advisers will insist on various protections for their client based on the circumstances of the deal and will request that the Seller provides certain warranties, guarantees and indemnities to limit their client's risk relating to those particular assets.

Seller’s Position

Buyer’s Position

Limitation of Liability: A Seller’s advisers will always look to limit the liability of the Seller by incorporating provisions dealing with limits to the overall liability of the Seller for any claims made by the Buyer following Completion.

This ties in with “Disclosure” Below.

Due Diligence: Buyers are always advised to examine everything very carefully. This can and usually does add additional time to the length of the transaction. Share sales typically take a lot longer to complete than asset sales for this very reason… A single asset is usually easier to investigate than a company with lots of moving parts.

Tax advantages: When selling company shares, the Seller is usually able to take advantage of Business Asset Disposal Relief (Entrepreneurs Relief) (and Capital Gains Tax allowance and other tax breaks) to remove a portion of the tax liability he would otherwise have incurred.

At the date of writing (December 2020), our understanding is that Entrepreneurs Relief is likely to disappear in the near future. So you should expedite your sale if you are looking to take advantage of this relief.

Please discuss taxes with your accountant.

Warranties and Indemnities: As a result of the Due Diligence, Buyer's advisers will insist on various protections for their client and will want the Seller to provide warranties, guarantees and indemnities to cover any known or potential risks after completion. These provisions are among the most heavily negotiated legal terms in a transaction and can drag out the discussions between the parties. 

Often clients feel frustrated that the lawyer to lawyer negotiations are taking longer than originally envisaged, but please know that lawyers are simply trying to do the best job possible for the client.

Consideration: The structure of the “consideration” (i.e. amount to be paid by the Buyer) often involves an element of unknown or contingency, as opposed to a guaranteed amount to be paid. Sellers should not be confused by the different options and cash up front is always preferable.

This is a consideration in both Share and Asset sales.

Consideration can be based on Completion Accounts of the target which are drawn up usually by the Buyer’s or target’s accountants shortly after completion. They are used to determine the final amount of consideration to be paid by the Buyer based on where the company is up to at the time of completion. The Share Purchase Agreement will usually include a section or schedule setting out: what is included, the mechanism to adjust the price and when and by who they will be prepared.

An Earn-out arrangement where a future payment is linked to a formula based on the actual results of the target company or following the sale. An earn-out is used predominantly to obtain a more accurate valuation of the business and to ensure that the Sellers remain motivated as they retain a stake in the profits.

Any other element of deferred consideration, where payment of the balance is made according to a future schedule. A Seller may wish to have this “buy now, pay later” arrangement backed up by a personal or corporate guarantee, or even a loan agreement - secured or unsecured.

Transaction Costs: Professional fees for share sales are usually more expensive.

They are more expensive for the Seller for the simple reason that there is usually more work in preparing the company for sale and then meeting the Buyer’s requirements, including responding to Due Diligence and Share Purchase Agreement enquiries through to completion. In addition, where the Buyer requires reassurance on a particular issue, the Seller will occasionally be required to obtain a written opinion from a barrister or expert solicitor on that matter. This is often the case where there are regulatory compliance issues or where there is a multi-jurisdictional aspect to the transaction and foreign lawyer input is required.

There is also more work for the Buyer’s advisers, for example, the Buyer’s solicitors will usually prepare the share purchase agreement for the transaction which will need to include more extensive warranties, guarantees, indemnities and covenants to protect the Buyer's interests.

Reaching final agreement on the wording of the paperwork takes a lot more of the lawyer's time and legal fees can quickly escalate.

To cover this, our Corporate team is willing to consider a range of alternative fee options, including hourly billing, fixed fees, and success / completion-based fees.

Clean Break: A share sale is the simplest and cleanest sale from the Seller's point of view. This is subject to future liability and any deal to provide some limited period or support / handover. Once the shares have been transferred, the Seller is free and the business is someone else's asset (or liability) now.

Employees:  While TUPE* doesn't apply to share sales, the Buyer is effectively taking on all the employees and is responsible for honouring the original employment contracts.

This includes taking on existing disputes, tribunal cases etc. Which hopefully you will find out from undertaking full due diligence on the target employees and employment issues.

The flip side to this is that there is​ some scope to change employees' terms of contract or dismiss employees as TUPE generally does not apply.

Be aware that we have also seen staff using the transaction as an opportunity to make backdated claims against the business and the new owners. These are claims that would not have been made on the previous owners and may “suddenly” emerge out of the woodwork. The new owners would find themselves having to deal with the fall-out and the costs of settling the claim or going to an industrial tribunal.

*TUPE is shorthand for: Transfer of Undertakings (Protection of Employment) Regulations 2006.

Personal guarantees: Over the years the Seller may have extended Personal Guarantees (PGs) to various parties. One example is that banks take PGs when agreeing an overdraft, or Hire purchase companies often require the business owner to sign a personal guarantee to ensure safety of their assets.

Once a business is sold, these parties won't generally waive or release the guarantor from the PGs or transfer them to the new owner and the result is that the loans / liabilities will often have to be cleared by the Seller if he wants to be relieved of his responsibilities under the PGs.

Without a release, the Seller is in the precarious position of having a liability or responsibility without having any control over the business.

Rollover: Where the Seller takes part of his price in shares of the acquiring company he can "roll over" or defer some of the tax he's otherwise liable to pay on the gains he has made.

Transaction Costs: Share sales are more expensive when it comes to professional fees. They are more expensive for the Seller for the reasons described above, but they are more expensive for the Buyer as well as there's a lot more work for his advisers to do. 

Tax advantages: If there are accummulated losses in the company, those losses can usually (though not always) be carried forward to be written off against future corporation tax liabilities.

Please discuss taxes with your accountant.

Disclosure: The process of preparing the Disclosure letter and bundle of accompanying documents is more wide-ranging in a Share Purchase Agreement than an Asset Purchase Agreement, due primarily to the fact that acquiring a separate legal entity comes with it a body of information that can be rather expansive and complex. Negotiating the Disclosure Letter and providing the Buyer with the full bundle of documents can lead to further  delay and

Title to Assets of the Target: Title in everything rests with the company, not the owners, and by acquiring  shares the Buyer gets (clean) title to everything that's in the company name.

Customers and Clients: Customers and clients transfer from the Seller to the Buyer seamlessly. Relationships with suppliers, bank etc., also transfer over smoothly and don't need to be renegotiated. There is no break to the business, it continues without interruption.

Pre-Acquisition Restructuring: The Seller may need to restructure the target company or business before it is sold. For example, where the Seller is only selling particular assets or part of the business, or the Buyer is not prepared to take on certain liabilities or aspects of the business, a business sale would seem appropriate. There may however be other reasons (often tax) which make it more desirable to arrange the deal as a share sale. Where this is the case, the Seller may transfer (or “hive-off”) the business to a separate new company under its control, allowing the Buyer to acquire that new company (minus the aspects not for sale or not wanted) by means of a share sale.

Overall Risk: Buying shares is a lot riskier for the Buyer as he's taking on all the business liabilities, and the true nature / cost of some of the liabilities may not be fully apparent till a year or two down the road. There could also be liabilities that the Buyer hadn't spotted. For example, if on the day after the business changes hands a customer makes a personal injury claim on the business for a faulty product bought some days ago ... that is a liability that falls on the new owners, not the prior owners.

Additional Protections: The Buyer may require additional protections, for example “security” underlying the warranties and indemnities.

Where a “selling” company is disposing of a subsidiary, the Buyer may seek guarantees of the warranty liability from its holding company or its shareholders.

Another form of protection is an escrow account used to set aside a portion of the consideration to ensure there are funds to meet warranty claims or to satisfy a post completion price adjustment. This is often a fiercely negotiated issue.

Finally, W&I (Warranty and Indemnity) insurance can be obtained although, significant work can be involved in matching the policy terms and the terms of the sale and purchase agreement to avoid gaps in cover.

Stamp Duty: Stamp duty is payable by the Buyer when purchasing shares.

It is 0.5% at the time of writing this article.

Post-Acquisition Reorganisation: A Buyer may wish to carry out a post-acquisition reorganisation either for tax reasons or to integrate the target company or business into its group. This will involve additional professional expense.

Regulatory Concerns: Where a regulated entity is being invested in or acquired, the Seller will be under an obligation to advise - and seek the permission of - the regulators. For example, in the UK, the SRA (for law firms) and the FCA (for financial services businesses) will need to be informed and their approval can take up to six months. This can often be covered by an agreement to sign the contract and delay completion until regulatory approval has been obtained – approval in this case is a condition precedent to completion.

No approval = no completion.

Regulatory Concerns: Where a regulated entity is being invested in or acquired, the Buyer needs to be aware that permission of the regulators will be required and that the Buyer may be precluded from becoming a shareholder of an investor where there are for example, qualifications or certain criteria that a shareholder must meet.  This may cause a delay or ultimately scupper the deal