When a buyer is considering purchasing a business (“Target”), invariably prior to an extensive due diligence, the buyer often reaches the following crossroads: do they purchase the business in its entirety (“Share Purchase”), do they purchase the business as a going concern or do they cherry-pick the parts of the target business that are most valuable (“Asset Purchase”)? With each option comes a significant amount of deliberation; and there is no hard-and-fast rule to make a buyer’s decision an easy one. Each transaction needs to be judged on its own individual merits, taking into account a range of factors that should be taken into consideration when effecting the purchase. Similarly, the tax liabilities which arise for both purchaser and seller are quite different for Share Purchases and Asset Purchasers. The purpose of this article will be to provide an outline of a Share Purchase and an Asset Purchase, both from the seller’s and purchaser’s point of view, and will outline the pros and cons of Share Purchase and Asset Purchase respectively.
The Share Purchase transaction is one that is typically favoured by sellers, because the seller is able to consolidate the whole transaction into a bottom-line amount. This makes the transaction a far less complex transaction: the buyer purchases all the shares of the Target and takes the entire business as it finds it. All of the Target’s assets remain subject to all its liabilities. Although, in theory at least, an acquisition of shares as opposed to assets is more straightforward, because it involves the transfer of only one asset (that is, the shares), share deals can be more complex, because they often involve more than one seller. There may be a large number of shareholders with whom a purchaser needs to negotiate in the context of a share sale.
Advantages of a Share Purchase
- The purchaser does not need to contend itself with individual costly asset evaluations.
- Unlike an Asset Purchase, Share Purchases do not require numerous separate conveyances of each individual asset because the title of each asset lies within the Target.
- Sellers may also subject themselves to reduced future liabilities, vis a vis contractual claims, employee disputes, pensions, and benefit plans as this is transferred with the Target.
- The Share Purchase is relatively simple and quick to implement.
Disadvantages of a Share Purchase
- The purchaser acquires ownership of the Target with all the Target’s liabilities and obligations, regardless of whether known and regardless of whether disclosed.
- Depending on the size of the business, a Share Purchase will require extensive due diligence which can become very costly and time-consuming.
- Even if the seller provides an indemnity for the liabilities incurred by the company up until the date of completion, unless an amount representing the value of the indemnities/warranties is held on trust as security or a bank guarantee is procured, there is the risk that the seller may not have the funds to indemnify the purchaser when called upon to do so.
- The purchaser, upon the completion of the transaction, runs the risk of inheriting an unsatisfactory workforce with a conflicting corporate culture.
An Asset Purchase involves the purchase of some or all the assets owned by the Target. The seller retains possession of the legal entity and the purchaser acquires individual assets of the company. Examples of some of the common assets which may be sold can include but are not limited to, plant and equipment, land, buildings, machinery, stock, goodwill, contracts, records and intellectual property (including domain names and trademarks). From a tax point of view, an Asset Purchase is simpler than a share purchase, because the purchaser is not buying a company (and therefore its tax history).
Advantages of an Asset Purchase
- The purchaser can ‘cherry pick’ the assets from the Target and is not obliged to take ownership of any parts of the business which the purchaser deems unnecessary or financially unviable.
- The seller can provide significantly fewer representations, warranties and indemnities. This makes the transaction significantly more efficient and less complex.
- From the purchaser’s point of view, the liabilities of the Target will remain with the Target and will not transfer to the purchaser.
- The seller is more in control of what it is selling and is then able to keep certain assets, including the name of the business.
- There are significant tax advantages in that the purchaser can obtain ordinary tax deductions for the depreciation of the tangible assets purchased.
- The purchaser will not, generally speaking, inherit the seller’s tax history.
Disadvantages of an Asset Purchase
- Third parties may refuse to consent to assign or novate contracts to the purchaser which the purchaser considers to be vital to their decision to purchase the relevant asset.
- Assets may need to be retitled;
- Asset sales can involve a double taxation. Chargeable gains arise in the company’s hands when it sells the assets to the purchaser, and shareholders may then be taxed on the sale proceeds when they are distributed to them by the company in the form of dividends.
- With asset sales, the seller is more likely to be left with liabilities it must sort out and assets with little or no value.