Buying & Selling a Business

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.
   Certain assets, such as property and registered intellectual property rights will need to be formally assigned.
3. 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.
4. 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 and its 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 covenants.

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.

When looking to dispose of a business, the method by which this can be achieved depends on the type of seller. If the seller is a sole trader, partnership or limited liability partnership, this will be done by way of the sale of the assets of the business. However, in the case of a company, this can be done by way of a share or asset sale.

There are advantages and disadvantages of each method, depending on a number of factors, including taxation implications, reasons for disposal and the type of business you are selling.

Asset Sale
An asset sale means that you sell certain assets of the business, rather than the company in its entirety. Assets that often make up an asset sale include property, machinery, stock, contracts, goodwill and intellectual property.

Advantages of an Asset Sale

1. The level of warranties and indemnities a buyer should expect will be less if liabilities are to remain with you, as is often the case in an asset sale.
2. Given the reduced number of warranties, the disclosure exercise should be a lot less involved.
3. Where the seller is a company, any warranties and indemnities the buyer requires are given by the company, rather than the shareholders personally, although the buyer may require the shareholders to be liable, especially if it is envisaged that the company will cease to trade.
4. You may be able to obtain tax advantages through the use of allowable losses or capital allowances balancing allowances and still obtain the benefit of entrepreneurs’ relief if the proceeds of the sale are distributed to the shareholders.

Disadvantages of an Asset Sale

1. Should you wish to discontinue trading completely, you will have to deal with closing down the company and dealing with any remaining assets and liabilities after the sale.
2. There is a risk that you may incur a double taxation charge, which can occur through the payment by the company of corporation tax on the chargeable gains that arise on the sale and then the shareholders may have to pay income tax on the profits of an asset sale.

1. As the company is sold as a whole, rather than individual assets, it may be easier to maintain confidentiality around the sale.
2. There are various potential tax advantages of a share sale, including entrepreneurs' relief, roll-over relief, and no double tax charge (as may arise as a result of an asset sale).

1. Any warranties required by the buyer are given by the shareholders in their personal capacity, rather than by the company.
2. The disclosure process is likely to be more extensive due to the higher level of warranties and indemnities the buyer may expect a seller to give.