What is the Difference Between Share Sale and Asset Sale?

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What is the Difference Between Share Sale and Asset Sale?

September 3, 2021         Kaitlyn Oliver

A central consideration when buying or selling a business is whether to proceed with a share sale or an asset sale. Whether you are a seller deciding on an exit strategy or a buyer looking into your purchase options, there are many factors to consider. In particular, your choice of a share sale or an asset sale will impact tax outcomes, liabilities and transaction processes.

What is a Share Sale?

A share sale involves a company with shares deciding to sell the entire ownership of that company to a buyer. The buyer becomes a shareholder in the company and acquires all the assets through being the owner of the company which owns the assets. Share sales have been less popular than asset sales because all the assets stay with the company, including its liabilities. Therefore, buyers risk inheriting the company’s historical claims. For example, if a customer of the business received some negligent advice, they will have a claim against the company that the new buyer now owns. The new buyer becomes liable for the claim and paying compensation if required.

However, buyers’ reluctance to proceed with share sales can be lessened if indemnities and warranties are provided to protect buyers. A seller may provide a buyer with an indemnity that allows the buyer to sue the seller if a historical claim is brought. Provided buyers engage in extensive due diligence to protect themselves when making a share purchase, the risks to buyers can be significantly reduced.  

What is an Asset Sale?

An asset sale allows the buyer to purchase some or all of the assets owned by a company, such as equipment, intellectual property, goodwill and client lists. The buyer gains control of the assets that they purchase, while the seller retains ownership of the company that formerly owned those assets.

Should I Choose an Asset Sale or a Share Sale?

When deciding between a share sale and an asset sale, there are many factors to consider. The impact on liabilities, after-tax return and transaction processes is outlined below.

Liabilities

Share Sale: This process carries higher risk for the buyer as they take on all past and future liabilities of the company. However, this risk can be mitigated if the buyer seeks indemnities from the seller and their director(s).

Asset sale: Unless the buyer assumes any liabilities relating to certain assets in the contract, liabilities are generally not assumed by the buyer. There is less need for indemnities from the seller and lower risk overall for the buyer.

Capital Gains Tax (CGT)

Share Sale: This type of sale triggers CGT if the shares are held on capital account. The capital gain is the difference between the amount paid for the shares and the cost base of those shares. All capital gains and losses must be reported in your income tax return and tax must be paid on your capital gains. Certain taxpayers, such as individuals and trusts, may be eligible for the 50% CGT discount. It allows individuals to halve the gross capital gain from share sales before recording it in their assessable income. As a consequence, individuals making a share sale can pay half as much tax as in a company asset sale. The 50% CGT discount incentivises share sales for business owners and may result in buyers receiving a lower purchase price. There are also small business CGT concessions for the seller to encourage share sales.

Asset Sale: No CGT discount is available for the disposal of business assets.

Goods and Services Tax

Share Sale: GST generally does not apply to the share sale price.

Asset Sale: Sellers who are registered for GST and sell, transfer or dispose of a business asset must pay GST. However, if the asset is sold as a going concern, no GST is payable by the seller.

Transactions

Share Sale: The transaction process is simpler because ownership of the entire company is transferred to the new buyer. This means any existing contracts with clients, service providers or employees stay with the company. However, if there are any ‘change of control’ clauses in contracts entered into by the company, the consent of third parties may be needed to proceed with the sale. For example, you may be contractually required to obtain the consent of a landlord of a lease.

Asset Sale: A seller who owns multiple businesses under one corporate entity may prefer this route because it allows them to sell off certain business streams without needing to sell the entire company. However, transferring individual contracts with clients, service providers and employees to the buyer can be time-consuming and costly. Also, where consent is required from third parties to proceed, there’s a risk that they refuse to assign their contracts to the buyer.

In Summary

Choosing an asset sale or share sale depends on the business’ circumstances and whether you are buying or selling a business. It is important to ensure you are informed on potential after-tax outcomes, such as the 50% CGT discount or small business CGT concessions accompanying a share sale, as well as other relevant factors. You can contact the team of commercial lawyers at OpenLegal for assistance with the sale or purchase of a business by calling 1300 337 997 or by filling out the form on this page.

About Kaitlyn Oliver

Kaitlyn is a paralegal with OpenLegal while she completes her law degree at UNSW. She has previously worked at Redfern Legal Centre, and the Australian Human Rights Institute.