In this Quick Tips session, we quickly investigate the differences between share sales, asset sales, and business sales. It is certainly one of those areas that can create issues when sellers, buyers and perhaps their advisors miss to critically think about this concept before structuring the deal.
We have 2 ebooks available for download:
- What’s the main difference?
- Selling the shares versus the business or assets
- Benefits of a share sale
- Asset sale or business sale
- What to look forward to
What’s the main difference?
One of the main differences between share sale, assets sale, and business sale can be liability on the one hand and taxation outcomes on the other so we have two competing pressures as it were from both sides. Often there’s a way to integrate both perspectives of the buyer and seller to get a great deal for both parties.
But today, I just want to give a quick snapshot of what the difference is and maybe a few initial considerations and perhaps we’ll come back to this important topic in future podcasts and drill into it in further detail.
A share sale occurs in the environment where we have a company that has shares and a decision has been made to sell the shares (i.e. to sell the entire beneficial ownership of that company as a whole to the buyer.)
The alternative in this situation is an asset sale or a business sale where the company rather than having the shares being sold, (i.e. the whole company transferring over via the shares) sometimes there might be a business sale or an asset sale, in which just the assets from within that company are sold.
You can also have an asset sale or a business sale coming out of other entities like trust driven structures. But today we’re focusing mainly on the company structure because that is one of the most common structures that we see used by businesses as they are coming up to sale and therefore that is where this question of sale versus asset or business sale often comes into play.
Selling the shares versus the business or assets
Quite often a seller in a company structure environment will prefer to sell the shares rather than to sell the business or the assets because there can be more favorable tax outcomes and we’ll drill into some of these tax outcomes in future podcasts with accountants in this area.
But just suffice to say at the moment, it’s very important if you were working with a seller of a business that you ensure that they have taken the appropriate advice to consider whether or not a share sale rather than a business or asset sale might result in a better tax outcome for them (i.e. more dollars in their pocket at the end of the day after the transaction and after all of the taxes have been paid).
Benefits of a share sale
There are other elements to consider in terms of the benefit of a share sale over and above simply taxation.
Firstly, in a share sale you are in the position where the entire company is moving over so it can be a lot easier to transact in practice. There can be less effort and time involved in transferring the clients because new agreements don’t necessarily have to be signed with the clients, depending on whether there’s change in control clause within any of the client agreements.
There can be less time and effort involved in transferring suppliers because the supplier relationship with the organization continues exactly as it was before. Once again, subject to any specific contractual provisions that may require notification or consent prior to change in control in the beneficial ownership of the organization.
And of course, with employee contracts and other contracts, these are all the same because effectively as I said you’re passing over the company as a whole so the company as a whole simply continues to operate but just with different beneficial ownership sitting under it and sometimes also different management, depending on how that transition occurs.
Another relevant consideration relates to the assets of the company like intellectual property assets. If you have trademark registrations for example, these will be registered with an authority like IP Australia in Australia and those government bodies will need to be notified of a transfer of ownership in a business or asset sale environment, but not in a share sale environment. So that’s an example of how there can sometimes be other minimization in the amount of work that is involved in the transition of a company sale versus an asset or business sale.
Then finally, the one other item that I wanted to point to is the issue of warranties and indemnities and sometimes this can be one of the bigger issues of a share sale environment as opposed to business or asset sale environment.
With a share sale, the buyer of the company or the buyers of the shares in the company are purchasing the company as a whole with all of its trading history in the past and that means also all of the liability attached to the company. Many buyers will therefore require that there are extensive warranties and indemnities from the seller in order to protect them as the buyer for a certain period of time after the transaction completion in relation to any liabilities or risk or exposure they might have as a buyer now holding this company and the liabilities that are associated with that. That’s certainly one of the considerations in a share sale environment.
There’s a taxation consideration that might be a benefit to the seller. There is less time and effort involved in transferring the business as a whole because the company stays the same, which can be a benefit to both the buyer and the seller. However, on the flip side they might be seen to be more risk for the buyer and therefore more likelihood of warranties and indemnities that the seller will be required to enter into.
Asset sale or business sale
Let’s flip over now to looking at the asset sale or business sales side. Now I talk about asset sales and business sales as two separate items because when you have a business sale you generally refer to transferring a fully operating business as a whole as it is. But for an asset sale we’re talking about choosing particular assets that might be sold out of an entity but perhaps not a business as a whole.
In both an asset sale and a business sale, the negatives as I spoke about before, the share sale for the seller in a company structure might be taxation so it might end up that there is a negative taxation outcome for a seller. And as I said, we’ll drill into this in future episodes because I think it’s really important that these considerations are fully understood because it can make a material difference at the end of the day to the amount that a seller ends up with in their pockets.
I’ve certainly seen some sad examples of sellers who have gotten a great deal in a sale but because they had been incorrectly structured leading up to sale and then hadn’t been able to negotiate the right type of sale structure mostly because they just didn’t understand it before they came to us and then it was all locked in before we had the opportunity to help them understand some of the issues involved. They ended up handing over way too much in tax in comparison to the situation that they could have ended up in if they had properly understood the considerations between the share sale or asset sale.
But from a buyer’s perspective, there can be more effort, cost, and risk involved in transferring all of the contracts out of one entity and into another as part of a business or asset sale because what often has to happen in this environment is you have to deal with the transfer of each of the individual contracts from one entity to another. There’s also greater effort cost and risk in insuring assets and intellectual property are transferred to the buyer, in some instances depending on what the background of the business looks like.
And the final point to talk about here, which I touched on when we discussed share sales, is that there is generally inherently less risk to the buyer in an asset sale or business sale environment post completion because the liability remains with the seller and the selling entity because they will be retaining the company. Whereas you are simply, as the buyer, taking on the business in effectively a clean entity that doesn’t have the corporate history skeletons in the closet that the company as a whole might particularly in relation to taxation issues and contractual liability.
What to look forward to
In future episodes, we’ll talk a little bit about what are some of the risks post completion to a buy up and what are some ways that you can avoid that because even in a share sale environment you can minimize your risk for some skeletons in the closet as it were for a share sale if you use the right warranties and indemnities in business sale and asset sale environment. There will still generally be a certain degree of warranties and indemnities, but they’re not required to be as extensive as a share sale environment.
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