What is the Difference Between an Asset Sale and a Share Sale?
Asset sales and share sales are the two ways that a company can be bought or sold. Both have their advantages and disadvantages, and not all companies benefit from the same kind of sale. In this article, we’ll discuss the ins and outs of both asset sales and share sales and explore the benefits of each.
Asset Sale vs Share Sale
In an asset sale, the buyer will acquire selected assets and liabilities. The sale involves an asset purchase agreement. In this scenario, there will typically be a negotiation between the buyer and seller, whereby the buyer will select which assets or liabilities they want and don’t want.
In a share sale, the buyer acquires the company’s entire shares. They will also assume responsibility for the selling company’s assets and liabilities.
The main difference between an asset sale and a share sale is that in a share sale, the buyer will acquire all the company’s responsibilities – including liabilities and obligations. Sometimes these liabilities aren’t known to the buyer, and this usually comes with greater due diligence. Because of this, buyers will generally prefer an asset sale, while sellers would typically rather a share sale.
Advantages of an Asset Sale
- The buyer can cherry-pick which assets to acquire. They’re less likely to choose assets that are irrelevant to their current operation.
- The buyer is in a better position risk-wise. As well as having the choice of assets, the buyer can choose which liabilities to assume responsibility for. The remaining liabilities will stay with the buying company, and the buyer is protected from inheriting the company’s unknown contingencies or liabilities.
- From a seller’s perspective, they can choose which assets to sell and which to keep.
- An asset sale also has some tax benefits for the selling company.
- Allowable losses: If an asset is sold at a loss, that loss can become an allowable loss. An allowable loss can be set against other chargeable gains and reduce the seller’s taxable profits.
- Balancing allowance: Similarly, if an asset has rapidly reduced in value, the seller might be entitled to tax benefits.
Disadvantages of an Asset Sale
- The seller might receive a double tax charge, whereby the company is taxed twice for the sale. Initially, the company will pay a Corporation Tax charge on the capital gains made in the sale. Then, a further income tax charge might occur for the shareholders if they make a profit from the asset sale.
- The sale might be logistically long-winded, with individual contracts, negotiations, employees, properties, leases, and other practicalities coming into play. These might require consent from third parties, which could result in a time-consuming and tedious process.
- If a property or land is being transferred, the buyer might have to pay stamp duty. Stamp duty isn’t payable in a share sale.
Advantages of a Share Sale
- A share sale is a less complicated process. An asset sale can come with logistical issues, whereby assets and liabilities are outlined in an agreement, contracts are considered, and other agreements are made. In an asset sale, the selling company will typically have leftover assets or liabilities, whereas a share sale is clean-cut.
- In a share sale, business can generally run as usual. Employees typically don’t need to be transferred, and other than the change of control, nothing needs to change. The straightforward business continuity is advantageous for both the buyer and the seller, and the buyer can also maintain established relationships, customers, and reputation.
- While sellers can be subject to a double tax charge with an asset sale, there is only one tax charge with a share sale. The proceeds made from the sale are paid to the shareholders and taxed once.
- There is likely to be a chargeable gain if the shares are sold for more than the selling company paid for them. This could be a capital gains tax rate of 10% if the selling company is a trading company.
- The buyer will assume full legal rights to the company. It will be their company.
Disadvantages of a Share Sale
- The clear main disadvantage to a share sale is the risk for the buyer. In a share sale, all assets, responsibilities, and liabilities are passed onto the buyer – whether they want them or not. There might be some liabilities that the buyer isn’t aware of, but once they assume responsibility for the whole company, it becomes their concern.
- Due to the scope of responsibility and risk, there would need to be greater due diligence in a share sale. This could lead to further professional fees.
- Despite share sales being the more clean-cut and straightforward option, sellers sometimes want to hold onto certain assets. In this scenario, those assets might be transferred out of the business before the buyer purchases the company. This could result in additional tax charges and costs.
There is no ‘one way’ to sell a company. Share sales and asset sales have advantages and disadvantages for both the seller and the buyer, but risks can be mitigated. Either way, it pays to be prepared. For general advice, tax advisory services, or for support navigating your financials during an exit, get in touch with our specialist team.