Share Purchases versus Asset Purchases

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 a share 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.

A share purchase transaction is typically more appropriate than an asset purchase in the following scenarios:

1. Strategic Alignment: If a buyer wants to acquire an entire existing business, including its assets, liabilities, contracts, and relationships, a share purchase allows you to maintain the business as a going concern. This is particularly useful when the target company’s operations and brand value are critical to the strategic objectives.

2. Contractual Relationships: If the target company has long-term contracts, favourable supplier relationships, or customer agreements that are crucial to the business’s success, a share purchase ensures the continuity of those relationships, eliminating the need for renegotiation or transfer of contracts.

3. Intellectual Property: If the target company possesses valuable intellectual property rights, such as patents, trademarks or copyrights, a share purchase allows the buyer to acquire these rights without the need for separate assignments or licenses.

4. Employee Continuity: If employee retention and maintaining the existing workforce are important, a share purchase can be advantageous. By acquiring the shares of the company, the buyer inherits the employees along with their contracts, benefits, and experience, reducing the need for hiring and training new staff.

5. Tax Advantages: Share purchases can provide potential tax benefits compared to asset purchases. In some jurisdictions, acquiring shares may allow for the utilisation of tax losses, tax credits, or other tax incentives associated with the target company.

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.

An asset purchase transaction is typically more appropriate than a share purchase in the following scenarios:

1. Selective Acquisition: If the buyer is interested in acquiring specific assets of a company rather than the entire business, an asset purchase allows them to choose the assets that align with their strategic objectives. This can be advantageous when they don’t need or want to assume all the liabilities and obligations associated with the target company. Additionally, it provides a more straightforward and efficient way to acquire those assets without the complexities associated with a share purchase.

2. Liability Control: If the buyer aims to limit their exposure to the target company’s liabilities, an asset purchase can be beneficial. By acquiring only the desired assets, they can avoid inheriting unknown or contingent liabilities that may exist in the target company.

3. Flexibility in Structure: Asset purchases offer more flexibility in structuring the transaction and financing. A buyer can negotiate and structure the deal based on the specific assets being acquired, so they can structure the transaction to better align with their financial capabilities.

4. Cost Efficiency: Asset purchases can often be more cost-effective than share purchases. Instead of acquiring the entire business and paying for potentially redundant or unnecessary assets, an asset purchase allows the buyer to acquire only the assets they need, resulting in potential cost savings.

It’s important to consider the specific circumstances of the transaction, including the industry, nature of the business, legal considerations, tax implications, and strategic objectives, before determining whether a share purchase or an asset purchase is more appropriate. Seeking advice from professionals in mergers and acquisitions can provide valuable guidance, enabling you to make a well-informed decision.

Contact us

If you want to find out more about your purchase options, get in touch with one of the M&A advisers in our transactions team. Alternatively, read our educational guides to learn more about the business acquisition process:

• Learn more about selling your business
• Learn more about buying a business