The two most common ways by which a business will be sold are:
• By the sale of the shares in the company that owns or operates the business; or
• By the sale of the assets of the business to the new owner.
The latter method is what is known as an asset sale.
The benefit of an asset sale is that it enables the buyer to purchase only the assets and/or the part of the business that it requires. This avoids a buyer acquiring liabilities and risks that it wishes to avoid and often enables the buyer to commence its operation of the business free from the encumbrances that burdened the seller.
An asset sale can often be more complicated than a straightforward share sale. In a share sale, the buyer acquires everything that makes up the company and consequently the transaction is, in essence, one transfer of one asset – the company.
With an asset sale, the transaction must identify and transfer the separate assets that make up the business. This usually entails identifying what assets make up the business and carefully considering which of those assets the buyer wants. It may also require obtaining consent, approvals and agreements from the owners of specific assets that are leased and securing the novation of the contracts that the buyer requires.
When a buyer acquires a business by share sale, then the company continues as a going concern, the only change being that the ownership of the company has changed. By contrast, where a business is acquired by asset sale, the buyer can choose to operate the business very differently.
The treatment of the employees in the business differs considerably in an asset sale from that of a share sale. In share sales, as the company is simply changing ownership, the employer does not change (only the ownership of the employer) and consequently the employees remain attached to the company.
In an asset sale, the parties can agree how the employees within the business are going to be dealt with. The buyer can elect to offer the employees employment (with or without recognition of prior service depending upon certain circumstances) or not to offer any employment. Either way, how to deal with the employees of the business is a matter which must be considered and addressed in the asset sale arrangement.
A final consideration will be the tax implications of the transaction. There is greater stamp duty payable on an asset sale than a share sale for instance. The tax implications of the transaction will vary depending upon how it is structured.
Sellers preparing to sell their businesses should take advice on how to structure the sale favourably so as to minimise tax. Buyers looking to acquire a business should consider what the tax consequences are for them, depending on how the transaction is structured and evaluate the additional tax and costs that may arise from an asset purchase against the opportunity to manage risks and liabilities, which structuring the transaction in this way will achieve.
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Disclaimer
Ashbrooke Law publications are intended to provide guidance and general information. They should not be relied upon as legal advice. Formal legal advice should be sought on matters of interest arising from this article.