Selling A Business – Should You Sell Assets Or Sell Shares?
It is imperative that any business owner taking his/her business to market becomes familiar with the two ways to structure a business sale – the sale of shares & the sale of assets.
Make the wrong choice and it could mean leaving a lot of money on the table … or paying a substantially higher tax bill.
Each of these options has its own advantages and disadvantages. The full list of pros and cons (viewed separately from the buyer’s viewpoint and the seller’s) is here:
Buyers generally prefer to purchase assets rather than shares. Sellers prefer to sell shares as that is cleaner for them and more tax efficient. But the choice is a little more nuanced as we’ll discuss below, and the price is significantly influenced by the decision.
Share sale vs Asset Sale, Which Is Better And Why Should I Care? explains the difference between the two options:
(Sale of shares) is a transaction between the investor and the business owner. The investor pays funds into the owner’s personal bank account… There is no transaction to be recorded in the accounts of the business. The business continues without missing a beat. The investor gets a mandate to operate the bank account, a login to the business website and keys to the warehouse. He owns everything in the business.
An asset sale is a transaction between the investor and the business, not the business owner. The investor pays the agreed price into the business account, not to the owner personally…What does change is the business balance sheet – all the assets forming part of the sale are transferred to the investor and these asset accounts are adjusted accordingly (the balancing transaction being the payment the investor made into the company bank account).
Is it the seller or the buyer who gets to decide the structure? Or do circumstances dictate which structure should be used in a given transaction?
Ans: The decision is a matter for negotiation between the parties and the price will often reflect this choice. For example, a buyer may be willing (or forced) to pay more for an asset purchase as he stands to derive several operational and tax benefits from such a structure. Similarly, a seller may be willing (or forced) to accept a lower price for a share sale as he is taxed less on the capital gains if he claims Entrepreneurs’ Relief.
There are several other tax considerations, too, and on both sides of the transaction, with respect structuring the sale as a share sale or an asset sale. There is also the option of a pre-transaction reorganisation to hive-down (or up) some of the business’s assets prior to the transaction. Professional advice is highly recommended.