Asset Purchases vs. Share Purchases: Which is Right for Your Business Deal?
When acquiring a business, a buyer has the option of acquiring the company’s shares (a share acquisition) or its assets (an asset acquisition). Both structures aim to achieve similar commercial objectives but offer distinct advantages and disadvantages that should be carefully evaluated before proceeding with the transaction.
In a share acquisition, the buyer acquires all (or a majority) of the shares in the company, taking ownership (or majority ownership) of the company in its current form, including all assets and liabilities.
In an asset acquisition, the buyer selectively acquires the company’s assets and rights, leaving behind any unwanted liabilities or obligations that may be retained in a share acquisition. This allows the buyer to avoid assuming any risks associated with the business.
What is a Share Acquisition?
Companies limited by shares have their own legal identity and own their business, property, and assets. In a share acquisition, the buyer purchases the shares of the company, which means they inherit all assets, liabilities, and obligations. This includes loans, hire purchase agreements, and outstanding tax payments.
To safeguard the buyer, the buyer’s lawyers must carry out a thorough due diligence process, to ensure full disclosure of existing liabilities, allowing the buyer to either proceed with the acquisition or renegotiate the terms to account for any unwanted liabilities.
What is an Asset Acquisition?
In an asset acquisition, the buyer acquires the company’s business, typically focusing on specific assets and liabilities they wish to assume. The buyer may choose to acquire assets such as the company’s name, logo, fixtures, contracts, machinery, stock, and customer or supplier relationships, while leaving unwanted obligations behind. Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), all employees engaged in the business being acquired must transfer to the buyer.
Key Considerations in a Share Acquisition:
Simplified Process for transitioning the business’ operations: The seller benefits from a streamlined transaction, as all assets and liabilities transfer to the buyer without selection.
Tax Advantages: Share acquisitions can offer tax benefits for the seller. The sale proceeds are paid directly to the shareholders and taxed only once. In contrast, asset acquisitions may result in taxes being due on the transaction itself, as well as on the distribution of proceeds.
Business Continuity: Most contractual agreements remain unchanged, ensuring operation stability (except where “change of control” or “termination for convenience” provisions apply, as these provide counterparties with options to terminate agreements if they do not wish to continue contracting with the buyer).
Due Diligence: Comprehensive due diligence is required because the buyer assumes ownership of the entire company, along with all existing, future, and historical liabilities. The buyer’s lawyers play a critical role in ensuring the buyer fully understands the scope of the acquisition.
Pros and Cons of Share Acquisitions:
Pros:
Cleaner for the Seller: With the exception of any warranties, indemnities and/or covenants provided in the Share Purchase Agreement (which are, albeit, usually time and value limited), the seller is relieved of all responsibilities related to the company once the sale is complete.
More Tax Efficient for the Seller: The proceeds are typically taxed only once, reducing the seller’s overall tax liability, and, in the Republic of Ireland, the buyer’s stamp duty liability may well be lower than on an asset acquisition.
Business Continuity: The company’s operations and relationships remain intact, ensuring continuity for employees, customers, and suppliers.
Cons:
High-Level Due Diligence: Extensive due diligence is required, as the buyer assumes responsibility for all assets, liabilities, and potential risks.
Increased Transaction Complexity: Due to the broader scope of the transaction, share acquisitions can be more complex to navigate.
Valuation Challenges: Determining the accurate value of shares can be difficult, especially if the company’s financials are not straightforward.
Potential for Additional Shareholder Approval: The acquisition may require approval from additional shareholders, which can complicate the process.
Key Considerations in an Asset Acquisition:
Reduced Risk: The buyer only assumes risks associated with assets and liabilities that they choose to acquire. This significantly lowers the risk of inheriting unknown or undisclosed liabilities.
Faster Process: Asset acquisitions typically move faster due to less extensive due diligence. The involvement of minority shareholders is often not required, as those who do not wish to sell their shares may be compelled to accept the terms of the sale.
Greater Flexibility and Control: The buyer has more control in selecting the specific assets they wish to acquire.
Pros and Cons of Asset Acquisitions:
Pros:
No Historic Liabilities: The buyer is not responsible for past liabilities or risks associated with the business.
Faster Process: Asset acquisitions generally involve a quicker transaction timeline due to fewer complexities and less involvement from shareholders.
Reduced Due Diligence: Due diligence is often less comprehensive, making the process more efficient.
Greater Flexibility and Control: The buyer has increased flexibility in selecting the assets they wish to acquire, giving them more control over the transaction and the business’s future direction.
Cons:
Renegotiation of Existing Contracts: Any existing contracts tied to the assets being acquired may need to be renegotiated or reestablished.
Risk of Losing Customers: The buyer may not retain all existing customers, as some may be tied to the original company structure or relationships.
Seller's Potential Disadvantage: For the seller, an asset acquisition may be less appealing, as they may be forced to retain unwanted liabilities that aren't included in the sale.
Complex Tax and Accounting Implications: Asset acquisitions can have more complicated tax and accounting consequences, requiring careful consideration to avoid unforeseen liabilities or costs. (In the Republic of Ireland, careful consideration needs to be given by a buyer to the stamp duty consequences of an asset acquisition.)
What Happens to Employees?
Asset Acquisitions: TUPE applies – employees transfer with existing terms if the business continues operating similarly. If not retained, the buyer may offer a redundancy package to the employees, via a settlement agreement outlining the terms of the redundancy and the employee’s rights in redundancy. Additionally, there is a consultation process prior to the sale of the business that must be adhered to.
Share Acquisitions: There is no equivalent obligation under TUPE – employees remain unaffected as the business structure stays the same.
When to Choose a Share or Asset Acquisition:
The choice between a share or asset acquisition depends on your goals for the transaction. If your objective is to acquire the entire business, a share acquisition may be the best option.
On the other hand, if you only wish to acquire certain aspects of the business, or if you have concerns about the potential liabilities, an asset acquisition may offer greater advantages.
Additional factors to consider include the tax implications and the structural differences between the companies involved.
Stamp Duty & VAT:
A share acquisition may be more beneficial to the seller, as the proceeds are generally taxed only once. However, it is important to note that the tax treatment differs depending on the type of sale. An individual seller of either assets or shares will likely be subject to capital gains tax, while a company selling assets will typically be subject to corporation tax. Additionally, both acquisitions structures may have implications for stamp duty and VAT, depending on the specifics of the transaction.
On a share acquisition, buyers must pay stamp duty of 0.5% in the UK and 1% in Ireland. However, on an asset acquisition, buyers must pay stamp duty land tax on certain property acquisitions included in an asset acquisition, whereas in Ireland, stamp duty of 7.5% is payable on most assets forming a part of an asset acquisition, other than certain intellectual property and plant and machinery.
Key Differences:
A share acquisition may be preferred by the seller due to favourable tax treatment, but an asset acquisition is often favoured by buyers because of its greater flexibility. A share acquisition may take longer, primarily due to the more extensive due diligence required.
In a share acquisition, the buyer acquires the company as it stands, including all assets and liabilities. It is important to note that buyers may renegotiate the terms to account for any unwanted liabilities. Conversely, in an asset acquisition, the buyer typically avoids inheriting historical liabilities, focusing only on the specific assets they choose to acquire.
Business continuity is less of an issue in a share acquisition because the company structure is retained. However, an asset acquisition may require more effort to obtain consents and approvals for existing contracts and licenses, potentially disrupting operations.
And the parties must always consider the tax consequences.
If you are considering a business purchase or need further clarification on the differences between asset and share purchases, our experienced Corporate & Commercial Team are here to assist you. We can guide you through the complexities of each option and help determine the best approach for your specific business needs.
This article is written by Becca Keane.