In simple terms, when you want to transfer ownership of a business, there are two ways to do it: through a share purchase or an asset purchase.
A share purchase is when the buyer buys the shares of the target company from its existing shareholders. This means they acquire the entire ownership of the company, including all its assets, liabilities, and obligations. It doesn’t matter if the buyer or the target company is aware of these assets and liabilities. Essentially, the buyer gets all the benefits and risks associated with the shares they purchase. Share purchases are often preferred by sellers because they provide a cleaner break and may have tax advantages.
On the other hand, an asset purchase is when the buyer selects specific assets and liabilities they want to acquire from the seller. The buyer and seller negotiate which assets and liabilities will be included in the purchase. Anything not included remains the ownership of the seller.
So, what are the main differences between these two methods, and what should you consider when deciding between them?
For share purchases:
It’s easier for the seller: In an asset purchase, the seller has to transfer all their assets and liabilities, while in a share purchase, they can sell the entire company without keeping any potential burdensome liabilities.
It’s often more tax advantageous for the seller: Share purchases may result in lower tax liability for the seller because the proceeds are taxed only once, whereas asset sales may face double taxation.
Business continuity is maintained: With a share purchase, existing contractual agreements usually remain the same, and there’s no need to transfer employment rights or gain consent from third parties to transfer assets or agreements.
In-depth due diligence is necessary: When buying shares, the buyer assumes all the company’s liabilities, so thorough due diligence is crucial to assess the assets, liabilities, and obligations involved.
For asset purchases:
Buyer is protected from historic risks: Unlike in a share purchase, the buyer only takes on the risks associated with the specific assets and liabilities they acquire, reducing the exposure to unknown or undisclosed liabilities.
It’s a faster process: Asset purchases tend to be quicker because there is less due diligence involved, and there may be no need to consider minority shareholders.
Less due diligence required: Since the buyer can choose which assets and liabilities to acquire, due diligence focuses only on those specific elements, making negotiations shorter and requiring fewer buyer protections and warranties.
Overall, the choice between a share purchase and an asset purchase depends on factors like the seller‘s preferences, tax implications, business continuity, historic risks, speed, and the extent of due diligence required.