Asset Purchases vs Share Purchases – The Differences

Asset Purchases vs Share Purchases – what are the differences? 

Put simply, an asset purchase is where the buyer purchases specific assets of a company whereas a share purchase is the purchase of the entire share capital of a company, resulting in a buyer indirectly inheriting its assets and liabilities.

Whether a buyer wishes to purchase the assets or shares of a company is usually dependent on the parties’ intentions for the transaction, the risks attached to the business and the type of business or product the buyer is acquiring.

Asset Purchases

An Asset Purchase Agreement (APA) or a Business Sale Agreement (BSA) is the fundamental contract that governs the transfer of assets from one company to another. The assets being transferred may typically include equipment, IP, machinery, databases, contracts and goodwill. By entering into an APA, the buyer ‘cherry picks’ the assets and leaves behind historic liabilities (unless they agree to take them on). The APA or BSA will typically include details of the purchase price and when this is due, warranties to provide the buyer with contractual assurances on the assets being purchased and restrictive covenants to protect the goodwill of the business.

Why would you do an asset purchase over a share purchase?

• The main reason is where the company has debts or significant liabilities, the buyer may wish to purchase the assets only in order to avoid taking these on and leaving the risks or debt with the company
• The shareholders may want to keep the company for other purposes e.g. another trade or business or investment portfolio
• It may sound obvious, but some smaller SMEs aren’t operated as a company at all and are run by a sole trader or general partnership. In these cases, an asset purchase is actually the only option.

Potential Complications

There are certain complications with an asset purchase that you may not have with a share purchase:

• Continuity of business – you do physically have to transfer all assets across. This may mean assigning leases, assigning contracts, transferring databases, changing names, transferring employees and complying with the TUPE regulations (to name a few). This can be costly and time consuming – and there is a greater risk to the buyer not getting the benefit of all of the business or contracts if an asset is ‘left behind’ or compromised.

• Some businesses are subject to regulation and not all permits or consents are freely transferrable, a buyer may need to apply for one in their own right in order to operate the business or regulatory consent may be required – for example businesses subject to a Premises Licences, registered with OFSTEAD or the CQC can face more complexity.

It is also important to note that in an asset purchase, the Transfer of Undertakings (Protection of Employment) Regulations (commonly called TUPE) provisions can apply giving applicable employees a right to transfer to the buyer’s employment, maintaining their continuity and terms of employment. You can’t simply ‘agree’ not to take them on where the TUPE provisions apply.

Share Purchases 

A Share Purchase Agreement (SPA) is the formal contract which governs the transfer of the entire share capital of a company. In this instance, the company remains the same entity, all of its assets continue to be owned by it, all of its contracts (including with suppliers, customers and staff) remain in place but under new ownership as it is the shares that are transferred, not the assets owned by the Company. A share purchase agreement will typically include operative provisions to transfer shares, details of the purchase price and how its calculated if there are post-completion adjustments, warranties, a tax covenant and restrictive covenants.

This structure has the benefit of maintaining better continuity of business. However, with a share purchase, the buyer will inherit all aspects of the company, including tax and financial history, historic claims and risks. Whilst some of this can be mitigated using warranties, indemnities and covenants in the Share Purchase Agreement, it is better to ensure that you understand the risks and liabilities first and determine if this is the right option for you.

You may still have third party and regulatory consents required, especially where there are ‘change of control’ provisions which would be activated by completion.

Why would you use a Share Purchase Structure:

• Maintain continuity of business – you don’t have to ‘transfer’ assets the company continues to trade in the ordinary course

• This is often preferred by individual shareholders as proceeds of sale are treated as gains, often subject to Business Asset Disposal Relief (at the time of writing assuming they qualify), and could therefore be more tax advantageous than a company selling assets, being subject to tax then paying tax when extracting value from the company.

Which option is better for you/ your business? 

The process of selling shares in your company or selling the assets is relatively similar in terms of the transaction process. Both will:

• involve due diligence so that the buyer can get to understand the assets, and potentially liabilities, to assess the deal

• include a contract for purchase, whether a Share Purchase Agreement, Asset Purchase Agreement or Business Sale Agreement

• include various contractual assurances and apportionments of certain liabilities as between a buyer and a seller

• include restrictive covenants to protect goodwill and provision to deal with post-completion continuity of business

However, the level of due diligence, contractual assurances and apportionment of any liabilities will substantively vary between the two structures as will the pros, cons, risks and assets for each of the buyer and seller.

If you’re thinking of buying or selling a business and want to know more about the options available to you, reach our to our corporate team on 0800 088 6004.