Buying a business: Shares or assets?

By Andrew Hill, head of corporate, Baines Wilson

Agreeing the structure of any transaction at the outset is obviously essential. Assuming the business is carried on by a limited company, the sale/purchase of a business can be structured either as a share deal or an asset deal.

While the general rule is that a buyer will favour an asset deal and a seller will prefer a share deal, the final decision will be the result of varying considerations.

Share deal

On a share deal, the shares in the company are sold by the seller to the buyer. For a seller, a share sale is attractive as the deal is effectively inclusive of all assets and liabilities.

Given all liabilities are to be inherited, a share deal can be quite risky for a buyer. To mitigate the risks involved, the buyer will normally carry out an extensive due diligence exercise to find out as much as possible about the business before doing the deal.

In addition, a well advised buyer will demand that the seller gives contractual assurances, in the form of warranties. The warranties will trigger a price reduction if there are any hidden liabilities.

The tax treatment of a share deal is likely to be favourable for a seller. Entrepreneurs’ relief may be available, so that a seller would pay tax at 10%.

Asset deal

The main advantage for a buyer of an asset purchase is that the buyer has the ability to “cherry pick” the assets it wants, and can leave behind the liabilities, which the seller will then have to deal with. Accordingly, there is less risk for a buyer than on a share deal.

A potential problem with an asset purchase is the need to transfer the contract of the business to the buyer. This will often require the consent of the third party.

It is likely that the main disadvantage of an asset deal for a seller is its tax treatment. There may be a double tax charge for the seller. Firstly, a corporation tax charge on the company on the disposal and, secondly, a tax liability for the shareholder when monies are extracted from the company.

Seeking advice at an early stage will help a prospective seller or buyer determine the best route for them. It is a decision which will require help from legal and accountancy professionals. If you are considering buying/selling a business and require further help in relation to it please contact Andrew Hill or Kate Parker on 01524 548494.