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The ownership of a business can be transferred in one of two ways, via a share purchase or an asset purchase.
In this guide, we'll explore the ins and outs of both, so you can decide which is more suitable should you find yourself in the middle of a business purchase or sale.
What is a share purchase?
In a share purchase, the buyer acquires the shares of the target (the entire issued share capital in a 100% acquisition) from a company's existing shareholders, enacted through a share purchase agreement.
Upon purchasing the target company's shares, the buyer acquires all of its assets, liabilities and obligations, regardless of whether the buyer or target company is aware of them. In other words, when a buyer acquires the shares of a company they are entitled to receive the full future benefit of those shares, but they are also exposed to all future liabilities (known and unknown).
This type of purchase tends to be more popular among sellers as it is a cleaner break and is often more tax advantageous.
What is an asset purchase?
In an asset purchase, the buyer acquires selected assets and liabilities, executed via an asset purchase agreement.
In this scenario, the buyer selects the assets and liabilities it wishes to acquire – or not – subject to negotiation with the seller. Any unpurchased assets or liabilities remain under the ownership of the seller.
Share Purchase vs Asset Purchase
With these definitions in mind, what are the key differences between these two methods, and what needs to be considered when deciding between them?
Key considerations for a share purchase
1. It's cleaner for the seller
In an asset sale there's no cherry-picking which of the seller's assets, liabilities or obligations to acquire: all assets and liabilities are acquired. The seller is not left with any potentially onerous liabilities relating to the business as all risks transfer to the buyer. A buyer can, of course, obtain protection via warranties and indemnities, although these are likely to be subject to conditions and caps.
2. It's often more tax advantageous for the seller
Share purchases may result in lower tax liability for the seller. While asset sales can be subject to a double tax charge – once on the gain from the sale and once when the proceeds are distributed – the proceeds of share sales are paid directly to shareholders and taxed just once.
3. It maintains business continuity
In a share purchase, contractual arrangements largely remain the same post-transaction, subject to ‘change of control’ stipulations. For example, employees remain contracted with the company, so there's no need to transfer employment rights. In contrast, with an asset purchase, it is more likely to be necessary to gain the consent of a third party prior to transferring an asset or agreement.
4. It involves in-depth due diligence
When making a share purchase, conducting in-depth due diligence is essential. This is because, upon purchasing the shares, the buyer becomes the owner of the company and therefore assumes any existing, future, or historic liabilities. In-depth due diligence is required to enable the buyer to assess all assets, liabilities and obligations and gain a full picture of the acquisition.
Naturally, the due diligence process is longer and more intrusive in a share purchase, whereas asset purchase due diligence will often only focus on the assets that are actually being required.
Key considerations for an asset purchase
1. The buyer is isolated from historic risk factors
Unlike a share purchase, where the buyer takes on all of the seller's liabilities, an asset purchase means that the buyer only assumes the risk from the specific assets and liabilities it is acquiring. For this reason, there's little or no exposure to unknown or undeclared liabilities – and less scope for unwanted surprises later down the line.
2. It's a quicker process
Asset deals tend to be the quicker option. One reason for this is that there is less due diligence involved in asset deals (see below). Another reason is that minority shareholders often do not have to be taken into account in an asset sale. Minority shareholders who would not want to sell their shares can effectively be forced to accept the terms of an asset sale where this would not be possible under a share acquisition.
3. It involves less due diligence
Because the buyer can cherry-pick which assets and liabilities to acquire, due diligence need only be carried out on the assets and liabilities being transferred. This means that negotiations tend to be shorter, with less need for buyer protections and warranties. In general, the process demands less involvement from a due diligence perspective.
If you want to find out more about your purchase options, get in touch with one of the M&A advisors in our transactions team. Alternatively, read our educational guides to learn more about the business acquisition process:Back to top