Differences between asset purchase and share purchases

What is An Asset Purchase?

An asset purchase allows a buyer to 'cherry pick' the assets (and on some occasions, the liabilities) which they would like to purchase from the seller, rather than them buying the shares of the company. As part of the process, an Asset Purchase Agreement (“APA”) will be drafted which will set out exactly what is being purchased. Unless stated otherwise, any assets which are not included within the APA will remain with the seller. 

Assets which are commonly purchased include:

• business premises;
• a lease of a premise (if leasehold);
• business contracts;
• intellectual property rights (signage and telephone numbers etc.);
• plant and machinery;
• goodwill; and 
• stock.

 What are the benefits for the buyers?

• Limitation of risk – the buyer can choose which assets and liabilities (if any) they would like to purchase, lowering the risk of any potential issues arising in the future.
• Faster transaction – the transaction timescales are sometimes shorter compared to a share purchase due to the decreased due diligence requirements and the reduction of shareholder involvement.

What are the disadvantages for the buyers?

• Structural complexity – there is sometimes increased complexity due to:

  • having to identify what is being sold;

  • negotiating transfer formalities; and

  • requesting and dealing with third party consents. 

• Application of TUPE – a buyer must comply with the applicable employee protections imposed by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246).

• Third party consent – where there are changes to the control provisions in a contract, lease, licence or permit, third party consent may be required.

What are the benefits for the seller?

• Limited shareholder involvement – an asset purchase is unlikely to require significant shareholder consent or other shareholder involvement.
• Negotiating position – professional fees for asset sales tend to be lower due to decreased due diligence requirements. The seller may be able to leverage this reduction in cost to negotiate a better price for the business. 
• Retention of assets – the seller can choose which assets they wish to sell and keep. If there is a share sale and a seller wishes to keep certain assets then these may have to be transferred out of the company prior to the sale of the shares, which may lead to additional costs and tax charges.

 What are the disadvantages for the seller?

• Sale proceeds – if the seller is a company, they could face obstacles when trying to extract the proceeds of the asset sale for its shareholders.

• Structural complexity – as mentioned above.

• Application of TUPE – the seller must also comply as mentioned above.

• Remaining Liabilities – the seller may be left with problem assets or liabilities that the buyer is not prepared to take on. 

What is a Share Purchase?

With a share purchase, a buyer is acquiring a business in its entirety including all of its assets and liabilities. During this type of transaction, the shares belonging to the existing shareholder(s) will be transferred to the buyer. The principal document involved in the purchase of shares is a Share Purchase Agreement (“SPA”), which will set out the terms upon which the buyer shall purchase the shares. 

What are the benefits for the buyers?

• Structural simplicity – the transaction is often simpler than an asset purchase as the buyer is acquiring a single asset (that is, the target shares).
• Application of TUPE – TUPE will not apply to the transaction, thus avoiding the need to inform and consult with the employees of the target business.
• Business continuity – as the whole business is being bought contractual agreements are likely to remain, meaning the business and its employees can continue functioning as they did before the sale.

What are the disadvantages for the buyers?

• Risk from unknown liabilities – the buyer acquires the target company subject to all its past and current liabilities.
• Shareholder involvement – if the buyer wishes to acquire 100% ownership of the target company, all the target's shareholders must agree to the transaction.

What are the benefits for the seller?

• Clean break – the seller makes a clean break from the target business, as the buyer takes the target company subject to all its past and current liabilities. 
• Sale proceeds – the selling shareholders receive sale proceeds directly. 
• Structural simplicity – the transaction is often simpler than an asset purchase as the buyer is acquiring a single asset (that is, the target shares). 
• Application of TUPE – TUPE will not apply to the transaction, thus avoiding the need to inform and consult with the employees of the target business.

What are the disadvantages for the seller?

• Shareholder involvement – the transaction may be frustrated if any of the target's shareholders are not prepared to sell their shares to the buyer on the terms proposed.

There are different tax implications for both asset and share purchases, so it is desirable to seek specific tax advice in relation your company and the transaction that you propose to undertake. 

How can we help?

If you are planning on buying or selling a business, get in touch with our specialist corporate and commercial solicitors today. 

Contact our team by telephone on 0116 247 2000, complete our contact form, or send us an email via  info@smithpartnership.co.uk. 

We also have offices across the East Midlands and Staffordshire with expert corporate and commercial solicitors, in Burton, Derby, Stoke-On-Trent and Swadlincote.