Often the first fundamental question a lawyer will ask when requested to prepare documentation for a sale of a business is:
Are you conducting an Asset or a Share sale?
Whilst for the most part this is a fairly straightforward consideration, oftentimes buyers and sellers will not fully understand the fundamental advantages and disadvantages of each option as they relate to their individual circumstances.
An Asset Sale refers to a circumstance in which only the assets of the entity which operates the business are sold. In relation to a company, this might mean all of its assets (including intellectual property, goodwill, stock, equipment etc) or it could mean only the assets which are strictly related to the business which the company is proposing to sell.
Where a company operates multiple businesses, it is integral that the Asset Sale documentation is clearly drafted so as to ensure that the company only passes ownership of the assets which are related to the business it intends to sell.
An unwitting misstep in some Asset Sales occur when a seller inadvertently passes title to property or resources that are shared between its businesses. Perhaps worse still is a situation in which the documentation is not sufficiently clear in describing which assets are excluded from the sale (and which the company may intend to continue to make use of). Such situations are often fertile ground for post-sale disputes.
A Share Sale on the other hand is when the share capital in a company is sold to a buyer. In circumstances where the buyer attains all of the shares, the buyer will effectively then become the proprietor of the business (or businesses) that the company owns and operates.
Pros and Cons
Depending upon the circumstances the motivations for choosing each option are numerous and can be somewhat complex, however in the most general sense, a buyer will often prefer an Asset Sale rather than a Share Sale as it will not entail the risk associated with taking on a company’s historical liabilities and potentially any unresolved legal claims against that company. In this scenario, one simply acquires the assets that they want or need, pays the agreed price and is on their way.
For the inverse reason, a seller may prefer to sell their business via a Share Sale. In this way they can pass ownership of the whole company over to the new owner together with the business and all it entails, thus not being left with the ongoing risk and administration of running the company. For the seller, a Share Sale also often avoids the administration and hassle of having to transfer employees, assign business contracts and leases to a new asset owner because, post sale, the company simply carries on running the business, albeit through new management.
Need for tailored advice
In deciding which is the right path for you in selling your business, it is integral to obtain customised and targeted legal and financial advice to ensure risk is minimised and that the bargain you have negotiated is as financially advantageous as possible. This includes seeking appropriate taxation advice to ensure that the proposed sale structure is configured for the best financial outcome taking into account your specific circumstances.
If you require advice in selling your business, contact Rankin Business Lawyers for practical, on-point commercial legal guidance.