During the sale of a company, the buy side and sell side have two deal structures to choose from: asset versus share purchase. It’s a complicated process because the parties benefit from structures that serve opposing objectives. Buyers will prefer acquiring assets, while the seller finds it advantageous to exit the company through a share sale.
Asset or share purchase? Discover how each structure works as we discuss the features of each deal in this article.
Key Takeaways
In an asset sale, the buyer purchases specific tangible and intangible assets, like equipment or patents, while the seller retains the legal entity. Buyers choose this to avoid liabilities. State laws often require shareholder approval for selling substantial assets.
Selling shares transfers company ownership, not just assets, with the buyer inheriting both assets and liabilities. Share purchase agreements detail shares sold, price, payment timeline, and warranties. Due diligence is critical to uncover hidden liabilities. Share sales often take longer than asset sales due to comprehensive company reviews.
Share sales simplify ownership transfer by acquiring shares. The acquirer maintains entity continuity but inherits liabilities. Asset sales transfer assets individually, avoiding liabilities.
What is an asset sale?
Definition and basic concept of asset sale: In an asset sale, the buyer acquires specific assets of the company, while the seller keeps ownership of the legal entity.
The types of assets typically included are tangible and intangible. Meaning, it can range from physical items such as furniture, inventory, and equipment to intellectual property such as patents, trade secrets, and copyright. It’s typically chosen by the buyer to avoid the company’s liabilities.
The legal framework governing asset purchases:
State Corporate Laws. Most US states dictate that you’ll need approval from your shareholders, members, or partners. This is the case when you’re selling “all or substantially all” of your assets, a legal term that refers to selling a large portion of your business’s property. If your sale falls into this category, you’ll need to get shareholder approval before moving forward. In other cases, like selling a piece of equipment, getting approval isn’t needed.
What is a share sale?
Definition and explanation of share sale transactions: To sell shares means selling the ownership in the company itself—not just its assets. The business’s assets stay, while the buyer takes over by purchasing the corporate shares.
The structure of typical share purchase agreements covers key details like the number of shares being sold, the final purchase price, the payment timeline, and basic warranties related to the shares.
Legal implications of acquiring ownership through shares:
When ownership is acquired through a share purchase, the buyer typically inherits both the company’s assets and its liabilities by default once the transaction closes. Because of this, there’s usually no need to negotiate which liabilities transfer over. However, buyers and their legal teams need to pay close attention to any hidden or contingent liabilities that could cause problems after the sale is complete. Being thorough during due diligence is a must before making a decision about whether you’re buying assets vs shares.
Timeline differences between transaction types:
There are no hard statistics on whether asset sales or share sales take longer. Due diligence negotiations significantly extend timelines for both, but other factors like third-party consents and shareholder approvals also contribute. Share sales often take longer because buyers must review the entire company, including all assets and liabilities.
Key Considerations When Choosing Between Options
For sellers: Share Sale versus Asset Sale
Asset sale pros: The seller might be able to negotiate a higher purchase price since the transaction will inevitably be complex, and there’s potential for higher tax obligations. With a number of liabilities retained, this structure gives them the chance to aim for a higher sale price.
Asset sale cons: What makes them more complicated than share sales is that every asset will require proper documentation and paperwork. Third-party approvals may even be required. In other words, this has the potential to become time-consuming and costly. Some liabilities usually remain with the seller rather than passing entirely to the buyer.
Share sale pro: A share sale is usually simpler for the seller, as it mainly involves transferring shares. Sellers may also reduce taxable capital gains and avoid certain taxes that would apply in an asset sale.
Share sale cons: Since sellers can sometimes lower their tax burden in a share sale, buyers may push for a reduced purchase price. Sellers might also need to agree to a lower price because the buyer is assuming greater risk by taking on the company’s liabilities. Buyers often require sellers to provide extensive warranties and indemnities to shield themselves against these risks.
For buyers: asset purchase or share purchase?
Asset sale pros: Buyers can avoid taking on all of the business’s obligations, unlike in a share sale. Financial analysis during due diligence can reveal liabilities. Buyers also aren’t obligated to retain all employees, though sellers may insist in order to avoid wrongful dismissal claims. Additionally, buyers may benefit from tax advantages by increasing the tax cost of depreciable assets, so future deductions will be greater.
Asset sale cons: Because sellers may face higher taxes in an asset sale, they might increase the purchase price to offset the cost. Specific assets can also be more challenging to transfer.
Share sale pros: If the company has strong goodwill, the buyer may benefit from continuing to use the seller’s company name. In a share sale, the price might be lower since the buyer takes on all liabilities. To manage this risk, the seller may need to offer warranties and indemnities to protect the buyer.
Share sale cons: A major drawback for buyers in a share sale is inheriting all company liabilities, making thorough due diligence a necessity. Buyers may also seek indemnities to cover certain risks. Employees usually stay on after the sale, but some contracts could trigger severance obligations under new ownership. Additionally, buyers may face less favorable tax treatment, with limited future depreciation claims.
Asset Purchase or Share Purchase
Share purchase vs Asset purchase: When deciding between these two, look into how ownership transfer mechanics work for both deal structures. In an asset sale, ownership changes hands asset by asset, requiring individual transfers, assignments, and sometimes third-party approvals. In a share sale, ownership transfer is much simpler, as the buyer takes control by acquiring the seller’s shares, leaving the company’s ownership of its assets unchanged.
The buy-side should also consider legal entity continuity when buying assets vs shares. In a share purchase, the legal entity continues operating as it always has, keeping its existing contracts, licenses, and employee relationships intact. This can be beneficial for maintaining ongoing operations but also means the buyer inherits the company’s entire legal and financial history. In an asset sale, the buyer typically sets up a new or separate entity to hold the acquired assets, leaving the original company—and any unwanted liabilities—with the seller.
FAQ
Asset vs share purchase: Which one is right for me?
Every sale or acquisition is different when thinking about share sale vs asset sale, and there’s no single right way to structure a deal. If you’re planning to sell your business or buy another, working with business brokers like the WebsiteClosers.com team to help you find the structure that best fits your goals.
How does a stock sale of a small business work?
A small business stock sale involves deciding in advance how much ownership you’re willing to give up, since selling equity means your share of the business will decrease. You need to consider both how much control you’re prepared to lose and how much equity you should sell to meaningfully support your company’s growth.
Asset sale vs share sale: What are the tax implications?
When a business is sold through a share sale, the seller often qualifies for capital gains tax rates, which are usually lower than ordinary income taxes.
In an asset sale, however, the seller might face higher taxes because certain assets are taxed as regular income.
For businesses structured as C-Corporations, selling assets can also result in double taxation—first at the corporate level and again when distributed to the shareholders.
From the buyer’s side, asset purchases are typically more attractive since they allow for a step-up in the value of the acquired assets. This adjustment can provide increased depreciation opportunities and may help lower taxable profits if the business is sold in the future.
The points are only surface-level information. If you want to be directed to the best outcome, advisory services that help you choose between buying shares vs assets will go a long way.
What third-party consents might I encounter during an asset sale?
A non-assignment clause if the real estate you’re using is on lease.
Non-assignment clauses by government contracts
Non-assignment clause from suppliers
Conclusion
Making the right choice between share sale vs. asset sale can be challenging, especially when this will be the first time you’ll be selling your company. We’ve laid out some of the considerations above. But if you’re thinking about when to seek professional advice, the best time would be during the preparations for your exit.
Do you need help determining between asset purchase vs share purchase? Each company is built differently, and that’s what determines the best deal structure. Whether you’re planning to exit your company or looking for a business to acquire, let the WebsiteClosers.com brokers assist you. Call us today!
