Buying or Selling a Business – Share Purchase or Asset Purchase

Published in Business Law, Tim Brown

Buying or selling a business can be an exciting but daunting experience. There is a lot to consider and if you’re not prepared, you could run into trouble. That’s where we can help. One of the key questions you should ask yourself is “How should I buy the business – share purchase or asset purchase?”

The parties generally have the option of buying/selling the assets required to operate the business (such as plant and equipment, vehicles, stock and goodwill) or buying/selling the shares in the company that owns the business. There are pros and cons of both methods.

In a share purchase, the buyer buys all of the shares in the company and, as a result, automatically acquires all of the assets owned and liabilities owed by the company. In an asset purchase, the buyer does not buy any shares in the company but rather buys the assets of the company which are required to operate the business, without taking on the company’s debts and liabilities.

Share Purchase

A share purchase is generally easier and cleaner. The seller gets their money and walks away; the buyer takes control of the company that owns the business. There is no need to individually assign or transfer certain assets or contracts, as is required with an asset purchase.

A further advantage with a share purchase is greater continuity; the company continues to operate the business without interruption, albeit under the stewardship of new shareholders and directors. For example, any licences or permits required to operate the business will already be held by the company, which means that the buyer will generally not need to apply for new licences or permits, as they might under an asset purchase.

However, the main down side of a share purchase for the buyer is that he/she acquires the company’s historical debts and liabilities too. This increases risk, as the extent of the company’s liabilities may not always be known or disclosed to the buyer. It is especially important for a buyer to carry out a thorough due diligence investigation (legal, financial and tax) prior to confirming the contract and to include robust warranties and indemnities in the contract to mitigate this risk.

Asset Purchase

Some buyers may prefer an asset purchase, as it allows them to “cherry pick” those assets, contracts and employees they need to operate the business and leave behind any assets they don’t need. It also means the buyer will not take on any of the company’s debts or liabilities, so it is usually a less risky option for the buyer.

Conversely, sellers will often prefer a share purchase. However, in some situations it may be in the seller’s interests to opt for an asset purchase. For example, where a company owns and operates more than one business or a business that is split into several divisions, a seller may wish to divest itself of one business or one division of a business but retain others. Further, a company may have accumulated tax losses which can be off-set against future profits if there is continuity of shareholding, so it may wish to sell some or all of its business interests under an asset sale but retain those tax losses in the company.

Which method should you use?

Which method is best for you will depend on the particular circumstances of your transaction including the parties’ intentions and relative bargaining power, the nature of the business and the industry in which it operates and the historical performance of the company to name just a few.

It is essential that you seek legal and accounting/tax advice right at the outset to assist you to choose the most appropriate method.

DISCLAIMER: The content of this document is general in nature and is not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

Tim Brown has specialised in business/commercial law for over 13 years. Tim is an expert in all business law matters, including establishing new businesses, buying and selling existing businesses, restructuring and succession planning, commercial contracts, capital and debt funding, corporate governance and compliance.

For further information about buying or selling a business, please contact Tim.

Tim Brown (LLB, BCom)
Director / Solicitor

First Floor Conway Building
188 High Street
PO Box 576
Rangiora 7400