Selling your business: Shares or assets?

When starting the process of selling a business, there is a myriad of factors which need to be taken into consideration.

One of the main decisions you will have to make at this point is whether the transaction should be structured as a share sale or an asset sale.

Understanding the differences – and importantly the advantages and disadvantages – of these two types of sale is a vital part of this stage of the disposal process.

Put simply, the difference between a share sale and an asset sale comes down to whether you are selling the shares of the company which own the business; or whether you are selling some or all of assets (both tangible and non-tangible) which are owned by the company.

With an asset sale, the seller retains full ownership of the company at the end of the transaction; in a share sale, however, the buyer purchases the company as an entire legal entity with all business assets (and liabilities) forming part of the deal, but usually on a cash free/debt free basis.

From the point of view of the seller, each of these options comes with its own unique set of advantages and drawbacks.

With a share sale, the buyer will inherit the whole company including all liabilities as well as any ‘unattractive’ parts of the business.

Therefore, a share sale involves more inherent risk for the buyer, and as a seller you may be expected to provide warranties and indemnities in order to secure the sale.

On the other hand, an asset sale may be more complex, particularly if employees, properties, and contracts form part of the transaction.

You should also expect your buyer to select the more desirable elements of the company, leaving behind those assets not included in the transaction for you to deal with. This, however, works both ways, with you able to retain certain assets you particularly value.

While there are pros and cons to each option, there are also ways to mitigate the risks associated with each type of sale on both the buyer and the seller side.

In what can be a complex and sometimes lengthy process, preparation is key and knowing what you want to achieve from the sale is of paramount importance.

Do you want to sell the company and walk away completely, or would you like to have some involvement after the sale? Do you have accounts and other relevant information available and up to date? Do you know your company’s likely value on the open market?

Working with an adviser to put together a workable exit plan can help ensure you answer these questions, achieve your desired objectives, and walk away from the transaction feeling satisfied.