Asset Vs Share Sale
When you take your company to market, you have the choice of offering it for sale in two different ways – either the sale of the shares in the business or the sale of the selected assets owned by the business.
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Which Is Better For You - An Asset Sale Or Share Sale
When you take your company to market, you have the choice of offering it for sale in two different ways – either the sale of the shares in the business or the sale of the selected assets owned by the business.
What’s right for you may often, at first glance, not be right for an acquirer and vice versa. However, an M&A advisor will dig deeper into the belief and based upon their experience that there is always a deal to be done.
The successful brokering of a deal requires an advisor’s careful and deliberate negotiating and analytical skills working on behalf of his or her client but with an eye on the interests of the acquirer.
Before we examine asset sales and share sales, what are a potential acquirer’s motivations for wanting to own your business or selected assets owned by your business?
The Acquirer's Motivation
In nearly all cases, an acquirer buys a business (or the assets of a business) because he or she believes that there is a significant profit opportunity and because they believe they can make more money and achieve a higher market share than its current ownership. An acquirer greatly admires and respects how a business’s current ownership and management team have built the company to date. However, the acquirer is of the opinion that:
They have a specific skill set not possessed by the current management team. Their connections in and knowledge of your sector mean that they can reduce sales-related or variable costs, and/or there are significant fixed costs savings to be made by amalgamating your company or the assets your company owns into their corporate structure.
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- The absolute reduction of known and unknown risks as far as possible to get to as close to zero overall risk
- Payment of the lowest amount possible preferably stretched out over as long a time as possible
- From day one of their ownership of the assets or shares, there is little or no disruption in the continuation of the delivery of revenue from the acquired assets or company.
Purchasing a business (or the assets of the business) involves significant risk for an acquirer. In most cases, some or all of the money used for the initial consideration (the first payment an acquirer makes to you) is borrowed from third parties.
The repayment of any loan used to acquire the business or the assets of a business may put cashflow pressure on the acquired entity and on other companies within the acquirer’s group. In a few cases, the acquirer will have to agree to a personal guarantee on the funds they raise to purchase your business.
An asset sale is almost always the safer and cheaper option for an acquirer but this might not be in your best interest.
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pros and cons of share sales
With a share sale, the acquirer is buying the shares in and control over the incorporated business including those parts of the business which have no intrinsic separate commercial value as well as its liabilities.
In addition, on or soon after the day of completion, an acquirer is almost always expected to settle any outstanding contractual debts the company owes to finance companies including loans, commercial mortgages, leases, and more.
You should expect that the valuation of your business or business assets will be reduced by the amount of money owed to free up the cash for the acquirer to settle these debt accounts.
Prior to any share sale or asset sale, the acquirer and their professional advisors will carry out due diligence to find out to the greatest level of detail what it is that they’re actually buying. The longer and more complex the due diligence process, the more expensive the professional fees that you and your acquirer will have to pay whether or not the transaction completes or not.
There are multiple and equally valid ways of valuing a business. A share sale valuation is a lot harder in most cases than an asset sale valuation.
Much of the negotiation between you and the acquirer will be around selecting the actual method used to arrive at a valuation you both agree to.
Hidden traps: There are far more opportunities for an ongoing share sale to be aborted than an asset sale including but not limited to the following reasons:
- Uncooperative landlords demanding significant deposits from an acquirer to secure the right to operate from the same premises.
- Uncooperative shareholders who believe their interests are not being served by the sale of the company.
- Fundamental disagreements between you and the acquirer about the true value and longevity of the income streams of the company.
Earlier in this article, we mentioned acquirers’ strong desires to reduce known and unknown transnational risks as far as possible to get to as close to zero overall risk.
A share sale requires the acquirer to take the great with the not-so-great. Due diligence, although thorough, is an imperfect means of determining absolute risk and your acquirers’ solicitors may make it a requirement for you to personally indemnify, guarantee, and warrant the acquirer against any risks known and unknown for their greater protection.
Due diligence will likely take two or three months (in some cases longer) as your acquirers’ solicitors and accountants attempt to truly understand just what you’re offering for sale.
You decide how you exit – whether you want a clean break or you wish to have some involvement in the business’s future development, you choose the type of exit you want
Peace of mind – once the shares have been transferred, it’s no longer your responsibility – you can walk away for good if you please or you can help the acquirer to succeed without having to worry about the legality of the company’s actions (unless you’re still intimately involved in the decision-making process)
Tax advantages – although much less than before, you will benefit from Entrepreneurs’ Relief and, if you take a share in the acquiring company as part of the deal, you can defer or roll over some of the tax you would otherwise be liable to pay on your capital gain.
Easier to transfer customer data – unlike with an asset sale where there may be significant GDPR difficulties in handing over your customers’ personal details to your acquirer, this is perfectly legal with a share sale.
Solicitor and accountant fees – they are likely to be substantial and the cost will increase depending on the size and complexity of the business you’re selling
Possibility of a sale being blocked by other shareholders or third parties because of an inability to transfer licenses, permits, and online trading accounts, and so on that your acquirer will need to trade.
Legal uncertainty about any personal guarantees – many HP agreements will allow an acquirer to “novate” your existing contract over to them but you may be required to sign a personal guarantee even though you’re no longer in charge of the company.
Pros And Cons Of Asset Sales
With an asset sale, an acquirer purchases selected assets from your business which they believe are likely to produce future income.
Between you and the acquirer, you jointly determine and agree on the value of the assets to be sold. However, the acquirer will likely use multiple approaches in an attempt to value the assets they’re purchasing for less than you want to sell them at – these approaches often include relying on overly-negative foreseeable production predictions, trends in the marketplace, and the use of “independent” valuers they appoint.
Following the completion of the transaction, they’ll own no shares in the business – you and the other shareholders still own them – and your business continues to exist with all of its current assets and liabilities in place except for the assets you’ve sold.
To create an even more favourable outcome for your acquirer, their accountants will often make it a requirement that you forego any wear and tear allowance against the assets you’re selling – good for them and bad for you.
You choose the assets you hold onto – you continue to own both the company and the assets you wish to exploit however your company’s cash balance will be significantly boosted by the sale of no-longer-owned assets
Much harder for minority shareholder or third parties to block a sale – unless asset sales are covered by your Articles or the shareholders’ agreement
Much quicker sales process – the due diligence period for an asset sale is considerably shorter because of the relative simplicity of the transaction in comparison to a share sale.
Stronger negotiating position – the acquirer is only purchasing the assets they have identified as being worthy of ownership meaning that there’s little or no need to discount for unwanted assets and for known and unknown liabilities.
Profit offset – if you sell assets at a loss and you can demonstrate that loss, you can use those losses to reduce corporation tax
More complex and sometimes higher tax liabilities – get advice from your accountant about potential hidden traps including balancing charges. There is also the threat of double taxation on the gains when profit is distributed to shareholders.
The company is still your responsibility – if you intend to wind the company up following the sales of the asset, this is often complicated and expensive
More preparation work – in an asset sale, the seller and their professional representatives do most of the work particularly in ensuring that effective legal transfer of all selected assets takes place. However, you can charge a premium for this on the sale price
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