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Asset sale or Share sale? Which one to choose when selling a Limited Company?

 

 

 

Justin Wilson | Trainee Solicitor

When shareholders are looking to sell a Limited Company, they can choose to either sell the whole Company by a share sale or the business it operates by an asset sale. There will be many factors in choosing either of these when selling a limited company and it is always recommended to take legal and accountancy advice.

A share sale will involve selling the whole legal entity of the Company, which will include all of the company’s assets and liabilities, whereas selling through an asset sale will only involve selling the specific assets and liabilities agreed in negotiation of the sale.

Each situation is different, and circumstances of the buyer and the seller as well as the Company itself will ultimately determine how the sale progresses.

Who are the parties involved in both an asset sale and share sale? 

A share sale will be between the buyer and the individual shareholder(s) of the selling company with the buyer ultimately owing and running the company.

Contrary to a share sale,  an asset sale  will be between the buyer and the limited  company itself not the individual shareholders, and the buyer will not be taking over the company, they are only purchasing certain assets and sometimes taking on some liabilities  that the company has.

The position in terms of liabilities can be a determining factor for the buyer in deciding to proceed with either a share purchase or asset purchase. If the selling company has liabilities that the buyer deems to be excessive then this may sway the buyer towards an asset purchase rather than a share sale.

The sale process for an asset sale and share sale

Share sale 

In a share sale extensive due diligence will need to take place. As mentioned in the introduction, in a share sale the buyer will be inheriting the liabilities of the company as well as the assets, meaning the buyer will want to investigate the company in detail to see the strength of the company’s financial position as well as what assets and liabilities the company carries.

The selling Company may own/lease property, however this usually does not cause much of a problem in a share sale. The property will remain as a company asset meaning there would be no need for extensive negotiations with the landlord and their representatives to transfer/assign the property, however as the Buyer you will want to perform due diligence on this element of the transaction.

There will more than likely be employees of the company involved, however like the property element, this should not cause much of an issue. The terms and conditions of the employee will remain the same (unless expressly agreed otherwise), and therefore there will be no need for consultation of each employee saving time and money. The employees, however, should be notified before the sale takes place who the new owners of the company will be.

Asset Sale

In an asset sale you can transfer the business as a going concern (TOGC). This means that the seller will not pay VAT when selling certain assets of the company to the buyer.

The due diligence element of an asset sale can be seen as less extensive compared to a share sale because you are only dealing with the assets and liabilities (if applicable)  that are specific to the transaction, rather than all the assets and liabilities of the company collectively.

However, it is not all a walk in the park for an asset sale. You will need to deal with transferring each asset individually, performing due diligence on each of the assets

and incorporating the details of each asset into the asset sale/purchase agreement.

Following on from the above, in an asset sale there may be a property element involved. In a share sale it is a fairly straight forward process dealing with the property, but in an asset sale it is more extensive. You will need to negotiate with the landlord and their legal representatives (if any) i.e. obtaining the landlord’s consent, to transfer/assign the property to the buyer.

Employees are another issue with asset sales, more specifically in relation to the Transfer of Undertakings (Protection of Employment) Regulations. This is used to protect the terms and conditions of the employee and their employment. It is relevant when the business or a part of the business is transferred to a new employer. In this case the seller will need to consult each employee being transferred individually, which can be time consuming and sometimes costly.

Tax

Tax can be a leading factor in choosing an asset sale or share sale depending on whether you are the buyer or seller.

Share sale

The individual shareholders will be liable to pay Capital Gains Tax (CGT) on the sold shares, however because of Entrepreneurs’ Relief this may be reduced to 10% rather than 20%, depending if the shareholder is eligible to claim this relief. Please note that in the UK Government’s most recent budget some changes have been made regarding Entrepreneurs’ Relief and who is eligible to claim it, so it essential to check your eligibility for this relief.

The Buyer will have no need to pay Stamp Duty Land Tax (SDLT) on the consideration for any property that is transferred as part of the transaction as ownership remains with the company, however the buyer will have to pay Stamp Duty (SD) on the shares at  0.5% of the purchase price for transactions valued at more than £1000.

Asset Sale 

The seller, being the company itself, will be liable to pay Corporation Tax on the profit made from the sale of the assets. The proceeds can then be paid to the individual shareholders who will need to pay Income Tax on cash withdrawn as a dividend.

If the sale of the assets is a TOGC then the seller will not pay VAT on the sale of the assets.

The buyer is liable to pay SDLT on the consideration for any property that is transferred in the transaction.

As mentioned above, tax can be one of the determining factors for a seller deciding whether to proceed through an asset sale or share sale and it is advised that anyone who is dealing with such a transaction and is undecided on what route to take, to seek advice from an Accountant on the tax element of a share sale and asset sale.

What can Josiah Hincks Offer?

As a firm Josiah Hincks have an excellent and experienced corporate/company department, that have dealt with asset and share sales of Limited Companies of various sizes. We can help you through the transaction from beginning to finish providing advice on all the legal issues you may face.