Asset Sale vs Share Sale: Which Is Best?

Dan NailerLegal Assessment Specialist

Updated on 25th July 2024

As a business owner, you might come across the terms asset sale and share sale when thinking about buying or selling a business. Knowing the difference between the two is important because each one works differently and has its benefits and challenges.

In an asset sale, you are buying or selling the individual pieces of a business. These pieces can include equipment, inventory, property, and customer lists.

In a share sale, you are buying or selling the entire company by trading its shares. This means the buyer takes over everything - the good and the bad.

Choosing between an asset sale and a share sale depends on various factors, including the specific goals of the buyer and seller. In this article, we’ll explain the key differences between these ways to transfer business ownership, so you can decide which approach is suitable if you’re planning to buy or sell a business.

What is the difference between an asset sale and a share sale?

In an asset sale, you are buying individual parts of the business. That means you get to pick and choose exactly what you want to buy. For example, if you're buying a retail business, you might want to purchase the inventory, customer lists, and retail space lease but avoid taking on the existing staff contracts and supplier debts.

On the other hand, in a share sale, you are buying or selling the company's shares. This means you're taking over the entire company, including all its assets and liabilities.

Choosing between an asset sale and a share sale depends on your specific goals, the nature of the business, and the details of the transaction. It's always a good idea to consult with a legal or financial advisor to make sure you choose the best option for your situation.

What are the advantages of an asset sale?

Selective acquisition

If you're buying a business, in an asset sale you can pick and choose which assets to buy. This means you can select valuable items like equipment, inventory, and intellectual property while leaving behind unwanted liabilities, like debts or problematic contracts.

By avoiding unwanted liabilities, you reduce your risk. You're not taking on the business's past issues, just the parts that can help you grow your business.

Tax benefits

For buyers, purchased assets can often be depreciated for tax purposes, which can reduce taxable income and provide financial benefits over time.

For sellers, different assets might be taxed differently, and sometimes this can be beneficial depending on the types of assets being sold.

Simplified negotiation

In an asset sale, negotiations can be simpler because you're dealing with specific items rather than the entire company. This can make the sale process quicker and more straightforward.

Flexibility

Buyers have the flexibility to structure the deal to fit their needs better. For instance, you might only want to buy the profitable parts of a business while avoiding those that are losing money.

Sellers also have some flexibility in that they can choose to sell non-core assets while retaining the main business operations, providing an opportunity to streamline and focus on key areas.

Avoidance of hidden liabilities

By not acquiring a company's shares, buyers avoid any hidden liabilities like pending lawsuits or unresolved debts that might not be immediately apparent.

What are the advantages of share sales?

Simplicity and continuity

In a share sale, the seller is selling the shares of a company, which means the buyer takes over ownership of the entire business as it is. This includes all assets, liabilities, contracts, and employees.

For the seller, this means a smoother transition since everything remains intact, and the buyer steps into their shoes without disrupting operations.

Tax efficiency

Share sales can be more tax efficient as in the UK selling shares can qualify for Entrepreneurs' Relief, which means sellers might pay a lower rate of Capital Gains Tax. This can significantly increase the amount sellers get to keep from the sale.

Fewer legal complications

Since the buyer acquires the company as a whole, there's often less need to renegotiate or transfer individual contracts and licenses. This can save a lot of time and hassle, as you won't need to deal with multiple parties to get approvals and consent.

Employee retention

A share sale usually means the business continues operating as usual, which can be reassuring for employees. They remain employed under the same terms and conditions.

Comprehensive transfer

When a buyer purchases shares, they get everything in one go - intellectual property, brand value, customer relationships, and ongoing projects. This holistic approach can make a business more attractive to potential buyers, as they are getting the full package.

Liability transfer

In a share sale, the buyer takes on all the company's liabilities, both known and unknown. This can be beneficial for the seller because once the deal is done, the buyer assumes responsibility for any future issues or debts that arise.

What are the disadvantages of asset sales?

Complex and time-consuming

In an asset sale, both buyer and seller need to agree on the value of each asset, which can involve lengthy negotiations and multiple valuations. This process can drag on, taking up valuable time.

Contract transfers

Transferring contracts with suppliers, customers, or landlords often require third-party consent to transfer, which means you'll need to get approval from each party involved. This can be a hassle, and lead to delays or uncertainty if any party is unwilling to consent.

Potential tax implications

For sellers, the proceeds from an asset sale may be subject to higher rates of tax compared to a share sale. Additionally, they might face double taxation: once when the company sells the assets, and again when the proceeds are distributed to shareholders.

Employee concerns

Unlike a share sale where the company remains the same, an asset sale might require new employment contracts, potentially altering terms and conditions. This can create anxiety and instability among staff.

Piecemeal transfer

In an asset sale, not everything may be transferred. Certain licenses, permits, or intellectual property might be non-transferable or require separate negotiations. This piecemeal approach can result in parts of the business being left behind, complicating the transition.

Retained liabilities

In an asset sale, the seller often retains some of the business's liabilities, like debts or pending legal actions. This means sellers might still be responsible for certain obligations even after the sale.

What are the disadvantages of share sales?

Taking on liabilities

When a buyer purchases shares, they take on all the company's liabilities, including debts and potential legal issues. This can make a business less attractive to buyers, who might worry about hidden problems they'll have to deal with later.

Longer due diligence processes

Buyers will usually conduct thorough due diligence to uncover any potential issues before buying shares. This means they'll go through financial records, contracts, employee details, and more with a fine-tooth comb. This process can be lengthy, and stressful, and may require the seller to provide a lot of information.

Negotiating warranties and indemnities

To reassure buyers, sellers might need to provide warranties and indemnities - promises about the state of the business and compensation if these promises turn out to be false. Negotiating these can be complex and might expose sellers to future claims if problems arise after the sale.

Potential for higher costs

The process of selling shares can sometimes be more expensive than selling assets. Legal and accounting fees can add up, especially given the detailed due diligence and the negotiation of warranties and indemnities.

That being said, at Lawhive, our network of corporate lawyers can help you buy or sell a business for transparent, affordable, fixed fees. So, you can be confident in the knowledge of how much it's going to cost you to get the very best legal support in the UK for your transaction.

Minority shareholders

If a business has other shareholders, their interests need to be considered. They might not agree with the terms of the sale or could demand a higher price for their shares. Dealing with multiple shareholders and their demands can complicate and prolong the sale process.

Regulatory approvals

Depending on your industry, you might need regulatory approvals to complete a share sale. This can add another layer of complexity and potential delays as you navigate the required permissions and compliance checks.

How do asset sales affect employees?

In an asset sale, employees do not automatically transfer to the new owner. Instead, the buyer may choose to offer new employment contracts (potentially with different terms and conditions) or some employees might not be offered positions at all.

If employees are transferred, their employment rights should be protected under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE).

If a buyer decides not to retain all employees, there is a risk of redundancies.

How do asset sales affect contract transfers?

Many business contracts require the consent of the third party to be transferred. This means sellers need to get approval from each party involved.

If consent is not granted, it can jeopardise parts of the sale. And, even if consent is granted, third parties may use the opportunity to renegotiate the terms of the contract. This can lead to less favourable conditions for the buyer, complicating the sale process and potentially affecting the overall value of the deal.

Transferring contracts involves significant legal and administrative work. Each contract needs to be reviewed and appropriately handled, which can be a complex and detailed process.

Can asset sales result in better tax outcomes under certain conditions?

While share sales often come with tax benefits like Entrepreneurs' Relief, there are specific conditions under which asset sales can lead to better tax outcomes. These include utilising capital allowances, benefiting from asset-based reliefs, offsetting losses, taking advantage of depreciation recapture, and having flexibility in asset disposal.

Utilising capital allowances

When selling certain assets, like machinery or equipment, you might be able to claim capital allowances. This can reduce your taxable profit, as these allowances enable you to deduct a portion of the asset's cost from your taxable income.

Asset-based reliefs

Some assets might qualify for specific tax reliefs. For example, if you're selling intangible assets like patents or trademarks, there could be tax benefits associated with these sales under specific relief schemes designed for intellectual property.

Offsetting losses

If your business has accumulated losses, an asset sale might allow you to offset these losses against profit from the sale of assets. This can reduce the amount of taxable gain, resulting in a lower tax bill.

Depreciation recapture

For assets that have depreciated over time, the difference between the sale price and the depreciated value could be taxed at a lower rate compared to ordinary income. This can sometimes provide a tax advantage, particularly if the assets have been heavily depreciated.

Flexibility in asset disposal

An asset sale provides flexibility in how you sell off different parts of your business. You can time the sale of various assets to coincide with periods where you have lower income, potentially reducing your overall tax burden.

What are the typical due diligence priorities in a share sale?

When selling a business through a share sale, due diligence is an important step. It's a thorough inspection where the buyer makes sure everything is in order before making the purchase covering financial records, legal matters, contracts, intellectual property, employment terms, and business operations.

Here are the main priorities in due diligence for a share sale:

• Reviewing financial statements, including balance sheets, income statements, and cash flow statements;

• Examining tax records to confirm that all taxes have been paid and that there are no pending tax issues that could become liabilities;

• Looking into a company's legal structure to make sure all records are up to date and there are no legal impediments to the sale;

• Reviewing ongoing or past litigation, disputes, or legal claims to understand potential legal risks they might inherit;

• Reviewing significant contracts to ensure they are valid and transferable;

• Looking at the terms and transferability of lease agreements if a business operates from leased premises;

• Verifying that all intellectual property rights are properly registered and protected;

• Checking licenses and permits for operating a business to ensure they are valid and can be transferred;

• Reviewing employment contracts to understand the terms and conditions under which employees work;

• Examining employee benefit plans and pension schemes to assess long-term financial commitments;

• Assessing day-to-day operations;

• Reviewing technology and systems used by the business.

Due diligence will be more comprehensive the more time that’s available. Its scope can be narrowed when there is a competitive bidding process or a buyer can mitigate risk with warranties and indemnity insurance.

Asset sale vs share sale: which is better?

Deciding between an asset sale and a share sale when selling your business can be tricky.

Both options have pros and cons, and the best choice depends on your specific situation.

Asset sale

Share sale

The better option between the two depends on your specific circumstances and goal.

You might choose an asset sale if:

• You want to sell parts of your business but retain others.

• You want to avoid transferring liabilities to the buyer.

• You prefer more control over what is sold and retained.

You might choose a share sale if:

• You want a cleaner, quicker sale process.

• You aim to provide continuity for employees and operations.

• You're looking for potential tax efficiencies and want to avoid the hassle of transferring individual contracts.

It's important to consider your business's financial health, the needs of your employees, your tax situation, and your long-term goals.

Buy or sell a business with Lawhive

In summary, both asset sales and share sales offer their own advantages and challenges. An asset sale gives you flexibility and control over what you sell. While a share sale provides a smoother transition, but involves assuming all liabilities and extensive due diligence. Whether you're looking to sell parts of your business or the entire company, making the right choice requires careful consideration of your specific needs and goals.

At Lawhive, our network of expert corporate lawyers is here to guide you every step of the way, whether you're buying or selling a business. Contact us today for professional support and advice tailored to your business needs.