Buying or Selling A Business: Asset Sale v Share Sale

Selling and selling a business involves a lot more than just negotiating the sale value. There are other things to consider during negotiations where you can offset the sale amount. A significant decision would be the nature of the sale. The two options while selling a business are – share sale or asset sale. Both of these offer distinct advantages and there is no fixed answer for a particular kind of business. You need to understand and analyse each option keeping in mind the objective of the sale and the overall financial health of the business. There are tax ramifications and the length of the sale process could potentially be different in each of those options.  

Difference between share sale and asset sale

Asset sale

As the name suggests, an asset sale means selling some or all of the assets. Assets would include stock of goods, trademarks, patents and other intellectual property, the property, manufacturing plant, machinery and even client lists. In this case, the company would be making a contract with the buyer and after the sale, the company would continue to be the owner of the business. This way, the company (seller) may still continue to operate. 

Share sale

From a buyer’s perspective, they are purchasing shares from the selling company. It could be any percentage of the shares, which includes buying the entirety of the shares and in turn owning the company. Thus, the buyer will be assuming the liabilities of the selling company in addition to the assets. This can be a huge burden if the buyer does not conduct an in-depth due diligence by hiring independent professionals to look into the target company’s financials. 

What to consider while buying or selling: 

Buyer’s point of view – Asset sale

• Valuing and assessing assets during an asset sale is usually not a risky venture. Mostly, a buyer can be confident in the asset by verifying all the paperwork and condition of the asset(s). However, a technical audit from an expert may be recommended for businesses that rely on expensive machinery crucial to the running of the business.  

• While the asset side is relatively straightforward, it’s important to consider how the assets fit into the larger scheme of things. In an asset sale, the contracts between the seller’s employers and employees are not usually transferable. If the intention is to use the business, then new contracts need to be negotiated with the employees. The same goes for contracts with suppliers and other businesses. 

Buyer’s point of view – Share sale

• During a share sale, in addition to verifying the assets, the buyer also needs to ‘dig’ up any hidden liabilities or potential liabilities. This whole process certainly adds onto the cost of the purchase and can often dissuade buyers. Despite all precautions, there still might be some liabilities that a buyer may end up assuming. The potential for this can be significantly reduced by relying on competent industry professionals for the pre-sale audit and a comprehensive share sale contract.  

• Buyer has the chance to capitalise on the goodwill of the business from day one. Customers will usually not notice or be concerned with change in ownership if there is a smooth transition process. 

• In some situations the seller may not own the land and the lease would have to be transferred. The lease may have a clause related to transfer of lease, notice/ permission of the landlord, etc.  

Seller’s point of view – Asset sale

• Taxes such as GST and stamp duties need to be taken into account. These would be payable by the seller. There are certain exemptions from paying GST for falling under the criteria for a ‘going concern’. 

• Quite often, the stamp duties on asset sales are higher than those on share sales.

Seller’s point of view – Share sale

• The small business capital gains concession (CGT) should be kept in mind as it allows a seller to reduce capital gains from an active asset by 50% under certain eligibility criteria. A small business is classified as one where the aggregated turnover is less than $2 million.

• The seller has a reduced chance of liability from defective sales/ service, employment disputes and other day to day issues that may come up for the business after sale.

• Since most liabilities will be addressed and transferred during the share sale, the seller is free to commence new operations under a different name and structure a new company from scratch. 

• It can be harder to convince the buyer to opt for this mode of sale, especially if the seller has not maintained proper books of accounts in the past or if there is any pending litigation/ disputes against the company.  

In Summary

As you can see, there are a lot of dynamic considerations before a decision can be made about which type of sale is better overall. These are not easy decisions; an advantage to a seller may be offset by a disadvantage to the buyer. The sale agreement is a crucial document that will lay out the obligations and liabilities of each party going forward. Due diligence would be considered a necessity for buyers. For the seller, getting a higher price is not the only variable that matters. Tax implications for capital gains can be burdensome and each option should be considered by factoring in the legislative framework and legal obligations.