BUY THE SHARES OR ASSETS?
The answer may not always be what you think.
It’s well known that there are two main ways to buy/sell a business, namely by share purchase or asset purchase. Under a standard share sale the entire share capital of a company is transferred. One analogy is that this is the purchase of an entire corporate box with all its assets and liabilities contained inside. An asset sale however sees the purchaser simply reach into the box and select or ‘cherry pick’ the assets it wishes to acquire. The ownership of the box and all its remaining assets and liabilities stays with the seller. It is for this reason that asset purchases are usually preferred by buyers as they can obtain the elements of the business they want without taking liabilities of the company.
Under a company share sale there will of course be warranties, indemnities and covenants provided by the seller, but these will usually be qualified by limitations such as time limits for claims, financial thresholds etc. In short, the historic liabilities can land on the buyer and it’s up to him to pursue contractual redress from the seller, if available.
As a result, buyers usually want asset purchases. The problem, however, is that sellers often want the opposite. For them, the sale of the shares offers a clean break (subject to contract terms) and usually a more tax efficient sale. The reason for this difference in tax treatment is that if the company sells the assets under an asset deal, the sale proceeds are received into the company as the selling entity. The company must pay corporation tax before the shareholders can dividend out profit, which in turn they will be taxed on. In effect, it usually results in two layers of tax.
On the other hand, if the shareholders sell the shares they will receive sale proceeds directly. Not only is this just one tax event, it is quite possible that the rate of capital gains tax payable on those shares could be reduced to 10% by Entrepreneurs Relief or even zero by Enterprise Investment Scheme Relief.
So why do some of our clients actually favour selling their assets? Or in some cases when we act for buyers – why do they want the corporate box with all its liabilities?
If we look at the position of the buyers first, the main reason buyers seem prepared to take on the risk of acquiring the shares is that they have carried out due diligence and feel that they are prepared to accept the risk to save themselves the hassle that can arise from disrupting the businesses operational requirements. For example, buying the whole company means the VAT registration and returns are seamlessly maintained, same for PAYE arrangements. Contracts with third parties in the name of the company don’t need to be transferred and importantly, where premises are involved, landlords consent is not required. (because the company remains the named tenant).
So it is always worth discussing the pros and cons with the client before assuming that a buyer prefers an asset purchase. Likewise, from a seller’s perspective, there could be certain deal specific issues that make an asset sale attractive. For example, a shareholder who has an outstanding director’s loan account with the company could be in favour of the company selling assets to fund the repayment of that loan. The return of cash in this way to the shareholder is non-taxable.
Early brainstorming and co-operation between corporate and tax lawyers will help flush out any of these structuring issues which can add extra value to the client’s deal.