When looking to buy a business, as a purchaser, one of the key decisions you may find yourself faced with is whether to purchase the shares or assets of the vendor company.
When purchasing the assets of a business you are purchasing tangible assets (e.g plant and equipment); stock (e.g inventory); and intangible assets (e.g intellectual property and goodwill). In this scenario, the vendor is the target company and more often than not, asset purchases are structured as a purchase of a going concern business.
When purchasing shares, the target company remains in existence and you are purchasing underlying control. In this scenario, the vendor is the shareholder(s) and generally speaking you acquire ownership of all of the target company’s assets and liabilities.
The best option will invariably depend on your specific circumstances, and those of the target company and/or shareholder vendors. However, as a general guide the below table looks to highlight some of the key advantages and disadvantages of asset sales vs share sales.
|Advantages of Asset Sale||Comparative Disadvantages of Share Sale|
|Flexibility – The Purchaser can specify the assets it wishes to purchase and the liabilities (if any) it is prepared to assume.||Complete Package – The Purchaser acquires ownership of all of the company’s assets and liabilities.|
|Lower Risk – The Purchaser does not acquire any liabilities it does not specifically agree to. Further, assets are generally acquired free of encumbrance.||Higher Risk – Unforeseen liabilities are often assumed, such as historical tax liabilities.|
|Targeted Due Diligence – The Purchaser can tailor the scope of its due diligence investigation to the assets it intends to purchase, therefore reducing the time and cost incurred.||Extensive Due Diligence – Due to the level of risk involved, a comprehensive due diligence investigation is required into all aspects of the business, often incurring considerable time and cost.|
|Valuation – Often assets are simpler to value.||Valuation – Determining value can be complicated, particularly where a company is not a listed entity.|
|Shareholder Approval – Assuming the sale will be a “major transaction”, subject to anything specific in the Constitution or a Shareholders Agreement the sale can proceed with the approval of 75% of the company’s shareholders.||Shareholder Approval –Subject to provisions contained in a Constitution or Shareholders Agreement (e.g drag along rights), minority shareholders who refuse to sell may prove an obstacle.|
|Tax Advantages – For a Purchaser, the cost of assets can be reset to market value at the time of purchase. For a vendor, tax losses can be used to eliminate any tax liability on the sale.||Tax Consequences – The target company may forfeit imputation credits if 66% shareholder continuity is not maintained. It may also forfeit the ability to carry forward tax losses if 49% shareholder continuity is not maintained.|
|Disadvantages of Asset Sale||Comparative Advantages of Share Sale|
|Apportionment – The Purchaser and Vendor can often be at odds on how to apportion the purchase price as between plant and equipment; land and buildings; stock; and goodwill. This can cause a conflict between a vendor’s general preference for book value and a purchaser’s general preference for a higher value to maximise depreciation in later years.||No Apportionment – The sale is of shares alone. The transaction is often more straightforward and completed swiftly.|
|Change of Ownership – Depending on the number of assets, effecting the change of ownership and assigning key contracts of the business can be costly and time consuming.||Business Continuity – All aspects of the business remain on foot. The purchaser steps into the shoes of the vendor thereby reducing the need for costly and time consuming administration matters.|
|“No Assignment” – Key contracts may not be capable of assignment thereby reducing the value of the business to the purchaser.||“No Assignment” – Generally prohibitions against assignment are not an issue since the contracting party remains the same, however, it is important to consider the potential impact of change of control provisions in key contracts.|
|GST – Where the sale cannot be categorised as a going concern, or does not involve an interest in land, GST will be chargeable.||Exempt from GST – A share sale is treated as an exempt supply for the purposes of the Goods and Services Tax Act 1985.|
|Complexity – A high degree of settlement complexity is often involved as all assets must be transferred and the change of ownership recorded. In addition, appropriate measures to transfer employees or terminate employment must be put in place.||Less Complex – As only shares are being transferred the level of complexity is considerably less.
Employment arrangements stay on foot unless negotiated otherwise.
To understand the right approach for you, legal and accounting advice is essential.
If you are looking to buy a business and need help, contact one of our experienced team.