What is the difference between a share sale and an asset sale?

When running a business, company founders and shareholders will inevitably, at one stage or another, want to consider potential succession options, the most prominent being an exit by way of trade sale. This will typically involve either selling the shares in the company or selling the trade and assets of the business operated by the company.

While there are several routes that can be taken, it is important to establish what makes sense for the sellers and the business given their particular circumstances. This will ultimately depend on a number of factors, including tax and risk considerations, long-term plans for the business and the nature of the business that is being sold.

Asset Sale v Share Sale

Where an exit is proposed by way of a share sale, the sellers are the shareholders of the company. The buyer acquires the shares and, in doing so, effectively steps into the shoes of the existing shareholders and takes on the company as a whole. The company continues to operate as before, but under new ownership, with all of its assets, liabilities and obligations remaining within the company.

By contrast, where an asset sale is proposed, the seller is the company itself. The buyer acquires specific assets and liabilities that make up the business and can choose which assets to acquire. These may include tangible assets such as land, machinery and stock, as well as intangible assets such as intellectual property and goodwill (including reputation, brand and customer relationships).

Advantages & Disadvantages

A share sale tends to be more streamlined, as the entire business is being acquired, allowing the company to continue with minimal disruption. However, the buyer will inherit all existing liabilities of the company, meaning there is typically a detailed due diligence exercise and a comprehensive share purchase agreement involved in order to mitigate the risk taken on by the buyer. This approach tends to be favoured by sellers, as it allows for a cleaner break from the company on exit.

An asset sale is often favoured by buyers, as it offers greater flexibility, allowing them to ‘cherry-pick’ which assets and liabilities they take on as part of the deal, leaving behind any excess. However, the process can be more complex, as each asset must be identified and transferred individually. This can also leave the seller with liabilities that were not acquired, which must be addressed separately following completion. A further key consideration is the payment of sale proceeds, which are paid to the company rather than to the sellers directly (as would be the case in a share sale), so the sellers will need to think carefully about how those funds are extracted following completion, which may necessitate some prior tax planning.

How the choices affect the agreements

For share sales, the core document is the ‘Share Purchase Agreement’ (“SPA”). As the shares are being sold, all assets, liabilities and contractual arrangements remain within the company and continue under the new ownership. As the buyer tends to take on more risk in share sales, acquiring not only the assets but also the liabilities, the SPA tends to be a longer and more negotiated document.

For asset sales, the core document is the ‘Asset Purchase Agreement’ (“APA”), pursuant to which the agreed assets are transferred out of the business. The APA will set out which assets and liabilities are included and excluded from the acquisition. Given the buyer has more control over what it is acquiring under an asset sale, the APA tends to be a little shorter and more succinct than the SPA.

How to choose between the two

Careful consideration should be given to the implications of each structure. A share sale is often viewed as providing a cleaner exit for shareholders, as the sale of shares allows them to transfer ownership of the company in its entirety.

In contrast, an asset sale may result in the seller retaining certain liabilities or obligations following completion. The overall complexity of the transaction should also be considered, as asset sales often involve third parties such as landlords, customers and suppliers whose consent is required, which can result in a more protracted process.

The first three contacts that any seller should consult are (a) the proposed buyer; (b) their accountants; and (c) their solicitors. An open conversation with the buyer will reveal the reasoning behind the structure they propose, which can then be considered by the seller’s accountants and solicitors when advising on which structure makes the most sense for the deal.

If you would like to discuss any of the options outlined above, and how you can put your company in the best position to prepare for an exit, please contact our Corporate Team via info@leathesprior.co.uk or call 01603 601911.

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