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What is the difference between a Share Sale and an Asset Sale?


What exactly is the difference between a share sale and an asset sale and why might a buyer have a preference when acquiring a business?

As part of our ‘M&A Deconstructed’ series, M&A experts Nick Davies and Justin Levine discuss asset sales and share sales in mergers and acquisitions.

In addition to covering the basics, such as ‘what is a share sale?’ and ‘what is an asset sale?’, the two M&A specialists cover the pros and cons and tax implications of each and explain why the buyer of a business might prefer a purchase to be structured one way or the other.

Take a look at this in-depth discussion in the video or read through the transcript below…


Video sub-topic timestamps:

00:00 – Introducing Equity/Share Sale vs Asset/Business Sales
00:23 – What are share sales?
00:40 – What are asset sales?
01:00 – Why choose one over the other?
01:18 – Tax treatment of equity vs asset sales
02:25 – Buyers motivation: shares
02:37 – Implications of buying shares
03:15 – Outlook after Due Diligence
03:34 – Buyers motivation: assets
04:24 – Managing liabilities with asset sales
05:00 – Asset sales and added administration
05:25 – Consents and regulatory issues
05:56 – Advantages of shares sales
06:14 – Importance of Diligence
06:48 – “carve-outs” and partial divestitures
07:25 – Real-world “carve-out” example
09:49 – Necessity for reliable accounting
10:30 – Expect to negotiate

Video Transcription

The distinction and the differences between an equity or share sale versus an asset or a business sale

Nick Davies:
Justin, morning.

Justin Levine:

Nick Davies:
Hello again. We’re going to talk today about the distinction and the differences between an equity or share sale versus an asset or a business sale.

What is a share sale?

Nick Davies:
On a share sale, as we know, a selling shareholder is selling their shares in a company. That means they are selling the company and all that it has inside it: Which might mean liabilities, which might mean all of their assets, et cetera, et cetera.

What is an asset sale?

Nick Davies:
The alternative is that the company itself, not the shareholder, the company itself sells some or all of its assets, so it might be machinery, might be good will, customer contracts, and in that case, the company is the recipient of the proceeds of sale. And so there may be various reasons why a buyer or seller wants to do it one way or the other. Do you want to lead in and give us some of those reasons?

How are shares sales and asset sales taxed?

Justin Levine:
Yes. Well, there is, I mean typically with the businesses we sell, they are mostly equity sales, so the sale of the shares, and I think as you pointed towards, the tax treatment of the monies that are received is quite different. So, if you’re a shareholder, you own securities in a business, shares, ordinary stock or otherwise, then you’re taxed at a certain rate when you sell those shares.

Nick Davies:
On your gain.

Justin Levine:
On your gain. Exactly right. So if a company, and we always have to remember that, and forgive me I’m not lawyer in the room, but the company is a legal entity in its own.

Nick Davies:
It is. Yes.

Justin Levine:
It has an identity, and so if the company is selling its assets, it is selling the business.

Nick Davies:
It becomes the seller.

Justin Levine:
It becomes the seller, not you as the shareholder. So it’s fundamentally quite different. And of course, is that the tax treatment can be enormously different. I mean, if the business is selling part of its assets and continues as a going concern, it effectively makes a gain. And potentially that might be subject to corporation tax for example. If it’s not going to go on as a going concern, it may well be that that business can be liquidated in a voluntary liquidation, but of course then the tax treatment is quite different to how you’re selling the shares. So it needs quite a lot of thought, just purely from a tax point of view to say why. But the reasons why, so we have to look a little bit at the buyer’s motivation as to why they might want to buy assets versus buying the shares.

Justin Levine:
The important aspect is that if you buy the shares, the equity in the business, the buyer is acquiring the history of that business. So if a business has been trading for 50 years, it acquires that business entity, that legal entity, and it assumes all of its liabilities, potential liabilities, contingent liabilities for that business going back to day dot. So, there are businesses out there that trade that have issues in them. It could be customer issues, it could be product issues, warranty issues in its products. There could be HR issues, staff employee issues. And it could well could be tax issues for example. And it could well be that a buyer after it does its due diligence pre or after, at some point of the process says, “Listen, we like the business, the trade, but we don’t like the liabilities or the potential liabilities that might come with that business.”

Why do buyers prefer asset sales?

Justin Levine:
And there are businesses out there that have that. So in those scenarios, the buyer might say, “Listen, we want to buy the assets.” And of course, it’s a really important point this, because if a buyer requires the assets from a company, it can take the assets and the assets are all the physical stuff that makes up the business, the good will, which is the brand, the trade name and so on. It can take all of that. It can take all of the employees over, TUPE them across, transfer the people over to the employment of the buyer. In other words, it can maintain the business. It would have to be a different legal entity name, but it might have the brand name that it takes with it, but it can acquire the assets, but it leaves all of the potential large liabilities.

Justin Levine:
And we’re not talking about the accounting creditors and stuff like that, the accounts payable, it can leave all the liabilities behind with the company. So for example, if there is a serious product recall issue that the company may be liable for, by buying the assets, you leave that problem potentially behind. If there’s an employee issue, potentially you can buy the assets and leave that behind with the company. Of course the shareholders still have to maintain that. So from a buyer’s point of view, it’s quite attractive in a sense, or can be attractive to buy the assets of a business.

Nick Davies:
It can be neater, can’t it? I think that if on due diligence you do uncover these legacy issues, shall we say, of things that perhaps are imperfect in the company’s history, then cherry picking those assets can make a lot of sense. I think that it’s important to remember that from a buyer’s perspective on an asset sale and purchase, there’s a little bit more administration and logistics. You’ve got to deal with assigning contracts from the selling entity over to the buyer. So, customer contracts, can you assign them? Suppliers, will they deal with your new entity or will they only deal with the previous entity?

Consents and regulatory issues

Nick Davies:
It’s quite interesting for consents and regulatory issues because if your company is licensed, perhaps it supplies the aviation sector, perhaps it is a care home, those licenses to perform that work will be with the selling company. The buyer will need those licenses and consents to continue operating the business. Are they transferable? What’s the timeframe? What’s the cost? So there are advantages to an asset sale. There are also, I think, some logistical challenges with it. The advantage of buying the company by buying the shares is you’re buying a ready-made package that, off you go, don’t have to worry about asigning contracts and all that sort of stuff.

Nick Davies:
But as you say, it is a sort of ‘warts-and-all’ scenario, which goes back to one of our previous videos, demonstrates the importance of doing good quality due diligence. Buying shares and buying company is fine so long as you’ve actually got your eyes wide open, you’ve done a good due diligence exercise, and you’re actually fully aware of what you’re buying. The danger is doing inadequate DD [Due Dilligence], buying a company, and discovering the issues later. That’s a position that neither the buyer nor the seller want to be in really.

‘Carve out’ asset sales

Justin Levine:
Yes. I think that’s right. And I think in the practical sense, there’s two material drivers behind, let’s say an asset sale. One is a carve out. So if a business, and typically these are larger companies, they don’t want to sell the entire business, they have an element of the business and it could be a specific type of trade within that business, is they might say, “Listen, we don’t want to sell the whole company. We might be turning over 100 million and we’ve got 10 million trade line on this particular line of products or services.”

Nick Davies:
A trading division.

Justin Levine:
A trading division, or a trading brand name for example. “And we just simply want to carve that out, so we’re going to sell the assets.” And that’s a very common thing. But the second element is where there is genuinely a material recognition somewhere between buyer or the seller that there’s a material issue there.

Justin Levine:
And I’ll give an example. So long time ago there was a business that was, let’s say a mid-sized company and all of the shareholders and management team invoice their costs, their running costs into the business via service companies, via multiple service companies, and more than 15 I think of the management team/shareholders who were all operational in the business, working day to day, doing an active job, invoicing their services via service company. Now, I’m not a tax specialist, but it certainly in the due diligence process, the buyer said, “Listen, potentially you might be in breach of IR-35.” In other words, is that the inland revenue, or HMRC as it’s now known, may have a legitimate claim that says you are actually employees and you should be on the payroll of this company.

Justin Levine:
And of course, when the maths were done to say, “Well, what is the potential claim if it was substantiated?”, for example. It ran into, it was over a million pounds worth of potential liabilities. And of course the buyer said, “Listen, you as sellers have been running the business and you’ve been accepting the risk knowingly of what you’re doing, which may or may not be in line with the rules. We don’t know. But what we can say is it’s a question mark. You as sellers are comfortable with the risk, but we as buyers, we are not comfortable with that question mark.”

Justin Levine:
Now that’s one of those material sort of issues that triggers the point that says, “Well, why not sell us the assets and the good will and the trade and we’ll leave that potential IR-35 claim back with you guys.” And so it’s basically, it’s either a carve out or there’s an issue on the table that somebody knows about and it just is something that the buyers are not willing to buy.

Nick Davies:
I think it’s a good example, and I think that from a seller’s perspective on that particular example, they’re almost in no worse position because they were accepting the risk for so long as they were operating in that way. And once they’ve sold the business and the assets, then it’s up to them to regularise or not, or deal with that situation with the revenue if needed. I can understand why a buyer would be nervous about taking that sort of risk on.

Nick Davies:
But yes, I mean, tax treatment is key, and you’ve mentioned that. I think that you need a good accountant, a good CF advisor who can be looking at scenarios for you. Excuse me. If we sell the company, what’s the tax treatment? What’s my net gain? What’s my tax treatment? If I sell the assets, same question. What am I going to end up with? So it’s important to consider both methods for selling the company and to run some sort of forecasting of what’s the net result for me in pounds and pence if I do it one way versus the other.

Nick Davies:
So, as is often the case, the lesson or the message here is probably get advice, speak to your nominated tax and accounting expert, and work out what works for you, and see what the buyer’s prepared to do. Sometimes there’s got to be a bit of a negotiation or a horse trade on these things and both parties have got to be committed to doing the deal in the same way.

Justin Levine:
Yes, that’s good advice. I think that’s hopefully covered off the difference between an equity sale and an asset sale. So thank you, Nick.

Nick Davies:
Excellent. Cheers.

_ _ _ _ _ _ _ _ _ _ _ _

More from Series 1 of M&A Deconstructed

As part of this in-depth series, other topics discussed include:

Connect with the M&A experts

Justin Levine, Managing Director, The NonExec Limited M&A Boutique 
Justin leads a boutique exit advisory firm specialising in manufacturing, technology, IT, digital, healthcare, wholesale and distribution markets. With the support of a 15-strong virtual team of analysts and researchers, he helps private business owners with growth and exit strategies. Connect with Justin >

Nick Davies, Partner and Specialist M&A Solicitor, Steele Raymond LLP
Nick acts for a wide range of business clients across various sectors, advising on complex corporate transactions including company sales, purchases and mergers. Nick also advises on on mergers, de-mergers and re-organisation. Connect with Nick >

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If you have any questions regarding your business, a business exit, a merger or any other corporate legal query, please contact Nick Davies on 01202 294566 or email [email protected] 

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