In 30 years of practice, I have acted for thousands of clients when buying or selling their businesses.
One of the first questions I get asked apart from whether I think the business is a good buy or what do I think it is worth is – should I buy the shares of the company which operates the business or should I purchase the assets.
What is the difference between an asset sale and a share sale?
An asset sale is when the assets of a company are purchased.
The buyer may set up a new company or use an existing company to acquire assets.
In addition to the assets of the company it may purchase contracts, goodwill and take on employees.
Basically, the seller whilst selling the assets retains the company itself and is responsible for the liabilities and obligations of that cooperate entity.
An asset sale generally carries less risk for a buyer as the liabilities of the company are not transferred to them.
A share sale is where a company sells either all or some of its shares to the purchaser.
The buyer will take over the shares in the company and becomes a shareholder.
The buyer acquires all the assets including all its liabilities and obligations.
For this reason, shares sales are often not popular because of the uncertainty of such things as possible legal claims, defective products etc, which creates some aversion to share sales.
However, a share sale can produce a significant difference in the after-tax return compared to an asset sale.
Due Diligence for both an asset sale or share sale is a must
In any business purchase due diligence is important and things you should consider when looking at either an asset sale or share sale are:
- accounts receivable and payable
- balance sheets and tax returns including the business activity statements for at least three years and possibly more depending on the previous financial performance
- cash deposit and payment records
- clients lists
- contracts and agreement with clients
- corporate records of the business
- employment records
- intellectual property details of the business including trademarks, patents etc
- lease and hire purchase arrangements
- liabilities of the business
- minutes of directors’ meetings/management meetings
- plant, equipment, fixtures, vehicles
- stock records
- supplier agreements
- utility accounts
It is also important to speak to both the clients and employees of the business if possible.
Often you will be asked to sign a non-disclosure agreement to protect the information.
Once the due diligence is completed it may influence whether you proceed by either an asset sale or share sale.
How can FC Lawyers help?
We have over thirty years’ experience assisting both purchasers and sellers in both asset and share sales together with conducting complex due diligence.
Contact our team to discuss your needs.
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