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How to buy a business: Asset vs Share purchase.

Two open computer on a table with with a contract in the middle. Two people start with pens in their hands looking at the contract.

There are many reasons why you would be minded to purchase a business, be this in relation to expanding your business offering, expanding your client base, or taking over a profitable business with existing customers, business assets, cash flow, and a proven track record for growth and success.

Written by
Billy Shaw

But after finding the right business for sale, what options are available for you to purchase it?

In the UK, there are two main ways of acquiring a business, regardless of the type of business or industry. These are through an asset purchase or share purchase.

Both methods will achieve the same commercial aim. But bear in mind, there are key legal and tax differences which should be considered in the early stages of your purchase.

What is an Asset Purchase?

In an asset purchase, the buyer will take over the target business by acquiring the assets which are required to run the target business.

Such business assets may include:

  • the goodwill
  • key contracts
  • fixtures, fittings and equipment
  • plant and machinery
  • Intellectual Property Rights
  • business records
  • stock and IT Systems

In an asset purchase, it is common that the liabilities related to the business remain with the seller and original business owner.

What is a Share Purchase?

By contrast, in a share purchase, the buyer will acquire the shares in the company which owns and operates the target business.

Effectively, this results in the buyer owning the company which owns and operates the target business including all of the assets.

A registered company is capable of owning assets and liabilities in its own right. As such, all assets and liabilities commonly remain with the company when it is acquired.

How to choose the right purchase method?

The structure of the transaction is often dictated by the party with greater bargaining power and how much a business is worth.

However, this section will highlight the key differences and the main pros and cons of each structure from the perspective of the buyer.

What does the buyer get from the purchase?

Asset Purchase

The buyer acquires the assets which the parties agree the buyer will acquire.

The obvious benefit is that the buyer can pick and choose which business assets are to be acquired. Meanwhile, the liabilities relating to the business generally remain with the seller.

Share Purchase

The buyer usually acquires the entire share capital in the target company.

The potential disadvantage is that the buyer will be acquiring company “warts and all”. This will include the debts and other liabilities of the company, regardless of whether the buyer knew about them.

Formalities of transferring the business

Asset Purchase

As the buyer is acquiring a bundle of business assets, different formalities may apply for the transferring of each category of asset.

Such formalities can sometimes make the transaction more complicated.

Share Purchase

As the buyer is acquiring a single asset (the shares), the transfer of the business can be a simpler process. However, to protect the buyer, additional ancillary documentation, such as financial due diligence, is generally advised.

Stamp Taxes

Asset Purchase

Stamp taxes may be payable on the transfer of land and buildings (Stamp Duty Land Tax). Subject to the price attributed to land and buildings in an asset purchase. Stamp Duty Land Tax liabilities could be substantial.

Share Purchase

Unless the transfer is exempt, Stamp Duty is payable at a rate of 0.5% of the purchase price for the shares. This rate compares favourably with the Stamp Duty Land Tax rates that are charged if an asset purchase includes interests in land and buildings.

Employees

Asset Purchase

Employment contracts generally transfer automatically to the buyer pursuant to TUPE regulations. TUPE will place obligations on the Buyer to inform, and sometimes consult with transferring existing staff and employees.

Share Purchase

The employees will not generally be affected by the transfer, as the employer will remain the same entity (i.e. the company). However, from a commercial point of view, care should be taken to secure a smooth change of ownership. 

Final Thoughts

The above are just some factors that should be considered before embarking on the purchase of a business.

The ability to pick and choose the business assets to be acquired often pushes buyers to favour an asset sale. This helps the buyer avoid unknown and potential liabilities that cannot be identified by the company.

Where there is an opportunity to choose or negotiate the structure of the transaction, professional advice should be sought at an early stage. This should be from lawyers, business brokers, and accountants who can ensure that the best structure and finance options are adopted for you.

If you are thinking of buying a business and want to discuss your options, please contact us for a no-obligation chat. The sooner we are involved, the more we will be able to help.

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