As the old saying goes, there’s more than one way to crack an egg; similarly, there’s more than one way to buy a business. A seller can structure their sale either as a stock sale or as an asset sale. Each method has its benefits, both for the seller and for the buyer. The guide below first defines each form of sale, then gives a bird’s-eye view of the pros and cons of each when compared to the other.
What Is an Asset Purchase Agreement?
Both asset deals and share deals broadly achieve the same objective: they give you, the buyer, ownership of the business. But both in a legal sense and in a tax sense, the two are distinct.
An asset purchase is where the buyer takes ownership of the key business assets, such as the premises or its lease, its contracts, its intellectual property rights, and so on. In short, everything that is necessary for the day to day running of the business is bought out.
Depending on the precise deal struck, either some or all of the assets may change hands. The seller could wish to retain ownership of the business premises, for example, and instead issue a lease to the buyer. These details should be made clear before the buying process begins.
What Is a Business Share Sale Agreement?
A share purchase is where a buyer buys all of the business’ shares. Legally speaking, a limited company is its own private entity; that’s why property and other assets can be bought in the name of a business, and why a limited company owner is protected in the event of the business’ bankruptcy.
Either way, when a buyer buys all of the business’ shares, they gain complete control of the company and everything that belongs to it.
When you buy a company through a share purchase, you have to sign a share purchase agreement. This sets out any terms that the buyer and seller agree. As you can imagine, these agreements can be long and complex, particularly if the seller stipulates certain terms, if the business is complex itself, and if the payment terms are high or are deferred.
Which Is Better: Share Purchase or Asset Purchase?
The core difference is that in a share purchase, the buyer takes on the entire business, liabilities and all; in an asset purchase, they have the option of not buying particular parts of the business. For a simple example, the buyer may wish to buy the premises, but outfit it with new machinery; or they may want to buy the machinery and intellectual property rights, but move the business to a new location, and so will avoid buying the premises. As a result, asset deals are more common than share deals as they give buyer and seller greater flexibility.
Other advantages and disadvantages are as follows:
1) No Shareholder Troubles with Asset Purchases
In a share purchase, the buyer will usually purchase every share issued of the target company. They will therefore need the approval of every selling shareholder, which can be difficult if a) the shareholder(s) are not traceable or b) if they do not want to sell.
In an asset purchase, this isn’t necessary. The company that owns the assets will conclude the sale; this is subject only to director approval, not to shareholder approval. It is possible for a shareholders agreement to prevent the sale, but this is highly unlikely.
2) No Need to Identify Every Asset
Another reason to consider a share purchase is that it’s typically a lot simpler.
The core issue is that in an asset purchase, you need to identify each asset and liability of the business. You then have to consider which assets you would actually want to buy as part of the sale, and then come to an agreement with the seller with regards to them. A share purchase is much simpler; all you buy are the shares, and everything comes along with them.
Another advantage here is that in a legal sense, there may be specific formalities you have to adhere to depending on the kind of asset being bought. Property isn’t bought in the same way as a contract, or third-party consent to a change of control, for example. While this is work more for your lawyer or accountant than for you, it nevertheless makes the buying process more complex.
3) The Due Diligence Process
On the other hand, due diligence is typically more complex for a share purchase than for an asset purchase.
If you don’t know yet, due diligence is the research process that tells you everything you need to know about the business before you buy it. Because a share purchase involves buying the entire business outright, there is more due diligence (and perhaps due diligence of different kinds) that must be done when compared to an asset purchase.
Contact Chelsea Corporate Today
At Chelsea Corporate, we can help you find and buy businesses for sale. We specialise in off-market sales—where businesses are bought and sold without ever being officially listed for sale online or in print. As well as bringing you these golden opportunities, we can advise you on buying whichever business you’re interested in, whether it’s your first time or you’re a seasoned buyer.