Asset or shares - a purchaser's perspective

Borneo Martell Turner Coulston

1st December 2018

Legal Briefing

Borneo Martell Turner Coulston

By Georgia Jones

Borneo Martell Turner Coulston

IF you are in the market to acquire a ready-made business you may want to consider whether you should purchase the assets of the company or purchase the company itself by purchasing its shares.

Asset sale

An asset purchase involves buying the assets that the company owns, rather than owning the company itself. Often, the most significant asset of a company is its land and buildings but assets also include plant and equipment, machinery, stock, goodwill, contracts, records and intellectual property (including business name and trademarks).

From the perspective of the purchaser this means that you can choose whether you would like to purchase all of the assets of the company or just a few, this means that the seller can sell its assets individually to multiple purchasers rather than sell its business as a whole, diluting the competition by selling the business in pieces.

As you are purchasing the assets of a company you may purchase everything that makes the company operate without having to take on its liabilities (in most cases).

The assets may also be categorised as being sold as a going concern which has certain tax benefits.

However, the company may require consent from third parties before being able to sell its asset, if for example, a company leases a commercial property, it will need the consent of its landlord before being able to transfer the benefit of the lease which can cause significant delays and increased costs. Some assets such as licences may be personal to the company and cannot be transferred.

Often, the seller may require that in order to purchase the component parts of its business that you will also offer employment contracts to all of its current employees on substantially the same terms as the contract of employment that they already have.

If you are looking to purchase the property of the business you will be required to make a sometimes substantial stamp duty payment, this, amongst other reasons is why purchasers sometimes feel that a share purchase is the more commercially viable option.

Share sale

In order to own the company you must own its shares. If you were to purchase the shares of the company you are purchasing it as a whole including all of its assets and liabilities. The company remains the same before and after the purchase, but the owners of the company change.

Contracts, business names, leases and intellectual property are already in the name of the company, and so there is no need to assign these after the share purchase (unless the agreements specific otherwise) and stamp duty is payable on the price you pay for the shares, even if the actual market value of the shares is much higher. The stamp duty you will have to pay for the shares is often much less than the stamp duty you would have to pay on the purchase of the property if bought in an asset sale.

When purchasing the company rather than its assets you are also taking on its debts and liabilities. The usual due diligence should disclose what skeletons there are in the closet in the form of warranties and disclosures but this relies on the seller being honest. Often, the seller will indemnify you for the liabilities incurred by the company until the date of completion but this relies on the seller having the funds in place to be able to give that indemnity when the time comes.

Georgia Jones is a commercial solicitor at Borneo Martell Turner Coulston Solicitors, for more information on incorporation of your businesses terms and conditions please call 01604 622101.

Borneo Martell Turner Coulston