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BUYING A BUSINESS
ASSET OR SHARE PURCHASE?

There are two methods by which a business can be acquired – either by way of an asset purchase or a share purchase. Each of these methods has certain advantages and disadvantages and which route you decide to take will depend on the nature of the target business, your reasons for acquiring it and the tax implications for you and the seller.

Asset Purchase

An asset purchase involves the purchase of specific assets of a business, rather than purchasing the shares in a company. This may include physical assets, such as land, buildings, stock and machinery, as well as intangible assets, such as intellectual property and goodwill.

Advantages of an Asset Purchase

1

You can pick and choose, subject to what the seller is willing to agree to, which assets of the business you wish to acquire.

2

The seller can retain the liabilities of the business (although the seller may require the liabilities associated with the assets being acquired to be deducted from the purchase price). This can reduce the level of due diligence a buyer needs to undertake in relation to the business.

3

There are potential tax advantages, including making use of capital allowances roll-over relief (on both income and chargeable gains) and, where no land or buildings are included in the sale, no stamp duty to be paid.

Disadvantages of an Asset Purchase

1

Some liabilities, such as those related to employees, may transfer automatically when assets are transferred.

2

Key contracts of the business, such as customer and supply contracts, will not automatically transfer to the buyer (they will need to be assigned or novated). This will usually require the involvement of the other party to the contract, which could have a negative impact on trade.

3

Certain assets, such as property and registered intellectual property rights will need to be formally assigned.

4

The warranties and indemnities are given by the seller in the business purchase agreement, rather than the shareholders of the seller company. Therefore, you should consider obtaining personal guarantees from the shareholders to provide additional comfort.

5

Any restrictive covenants given by the seller to protect the value of the business will not apply to the shareholders of the seller, unless separately negotiated.



Share Purchase

A share purchase involves the purchase of shares in the target company from its shareholder(s). This means that you will acquire the company as a whole (often referred to as “warts and all”), complete with all of its assets and liabilities (including any you may not be aware at the time of the purchase).

Advantages of a Share Purchase

1

The contracts between the target company’s customers and suppliers will not be affected, unless there is a change of control clause.

2

There are various tax advantages that you may be able to gain by way of a share purchase, including benefitting from the target company's tax assets or trading losses. It may also mean a lower rate of stamp duty is payable, particularly if the assets of the business include land or buildings.

3

As the shareholders of the target company are party to the share purchase agreement, they stand behind any warranties and indemnities and are bound by any restrictive covenant.

Disadvantages of a Share Purchase

1

As you take on all the liabilities of the company, whether you know about them or not, a share purchase can involve a greater deal of risk than an asset purchase. However, seeking appropriate warranties and indemnities can help mitigate this risk, together with carrying out detailed due diligence.

2

The level of due diligence required on a transaction is likely to be higher due to you acquiring the liabilities of the company.



ASSET PURCHASE

A Buyer's Guide
  

SHARE PURCHASE

A Buyer's Guide


The information provided on this website is intended as a general guide only. It is not exhaustive or tailored to your individual circumstances. Please consult our Website Terms of Use for further information.


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