When clients approach us about buying or selling a business, the first question asked is always whether or not the transaction will be an asset deal or a share deal. This is a critical decision, which often comes down to tax planning and the approach of the parties, including if there are any specific liabilities with the target business which pose a risk to the buyer. While both approaches ultimately result in the acquisition of the target business, they are fundamentally different in practice, each offering distinct advantages and disadvantages.
1. What’s the Difference?
In a share deal, the buyer purchases some or usually all of the shares of the target business from the existing shareholders. The target business otherwise continues to operate and function as normal without requiring any assignments, novations or transfers of employees or real property to the buyer. Essentially the buyer is purchasing the target business ‘warts and all.’
In an asset deal, the buyer chooses what to buy and what not to. This means that the buyer can essentially ‘cherry pick’ specific assets whilst not taking on potentially harmful liabilities or onerous obligations. This can also be a solution where there are share capital issues discovered as part of due diligence meaning that there is a concern over the share title. An asset deal allows the business to start fresh with the new buyer without any historic issues or non-compliance unfairly hindering the buyer going forward post completion.
2. Why Does It Matter?
Each route offers advantages and disadvantages for the parties involved and below are some of the key considerations highlighted:
- Choice: In an asset deal, buyers can selectively acquire the assets and liabilities they want, leaving behind anything undesirable. This approach can significantly reduce risk. In contrast, a share deal involves acquiring everything, including historic issues and any ongoing liabilities, litigation or obligations of the target business. Therefore, a share deal will usually mean buyers will be more concerned with thorough due diligence and both parties with negotiating the documents to manage risk.
- Tax Considerations: One of the key drivers behind choosing to proceed with an asset deal or share deal will be the tax position. It is important to consult with your accountant early about this when considering your options and whether there would be any tax advantage with proceeding with either an asset or share deal over the other.
- Employees. With a share deal, the position for the employees remains unaffected as they will continue to be employed by the target business. Therefore, there is no need to discuss the proposed acquisition with employees prior to completion. This helps minimise any business disruption whilst the business acquisition is ongoing. However, with an asset deal you are subject to the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) which requires you to consult with employees, notify them of any changes to their employment expected as part of the transfer and give them an opportunity to object to the transfer. This can be unsettling for employees and there is a risk the transaction may not proceed but you have already consulted with employees.
- Post-Completion Requirements: Asset deals can require more post completion work as any contracts transferring will need to be assigned or novated or a new contract with the relevant supplier, customer etc… entered into. As well as this any website domains will need to be transferred alongside any intellectual property transferring from the target business. The seller may also need to wind down the target company post completion where it is left as a shell, which will require an insolvency practitioner to be appointed and due consideration must be given to all time limits in the documents. Whereas, with a share deal everything remains much the same in the name of the target business, however you do still need to check for any change of control clauses in key contracts which could allow the other party to terminate the agreement on the shares passing to the buyer.
- Data Protection: Linked to the above, an asset deal has more data protection considerations to be alert to around transferring personal data on completion. For example, if purchasing a client/customer book it is important to confirm from a buyer’s perspective that the seller has obtained the relevant consents to a transfer in a business acquisition. If not, transferring the personal data across without consent is likely to be a breach of data protection legislation with potentially severe consequences, including a fine, reputational damage etc… With a share deal, data protection is still important, however here the main concern is to conduct due diligence to confirm the target business has complied with its data protection obligations and if there are concerns to either seek further protection in the documents or in serious cases, the buyer may decide not to proceed.
- The other parties preference: Regardless of any of the above, it will depend on the parties preference as to how the deal proceeds. In particular, where one party has a strong preference either way, this may be a deal breaker to proceeding with the transaction. In general, sellers will typically prefer a share deal versus a buyer who will usually prefer an asset deal. However this is not always the case and preferences of the parties will often hinge on a multitude of factors and considerations, including those above.
- Hive up: Another option for our corporate buyers is to purchase the shares from the third party shareholders in circumstances where the sellers have a strong preference for a share deal and then hive up the business post completion before winding up the original target company which is now a shell. This has the benefit that it would be treated as an intra-group transaction and gives the buyer more control, albeit it is more work and time intensive.
As a real-life example, we had a client who wanted to buy all of the shares in a target company. The target company itself was over 30 years old and due to the age of the company, not all documents were readily available at Companies House. After due diligence on the share capital an issue with the share capital was discovered and there was a concern over whether the seller owned all of the shares and was able to transfer the entire issued share capital. A key consideration was whether to move from a share deal to an asset deal or to hive up the business post completion. This offered alternatives to the less desirable outcome for all parties of the deal not proceeding. Ultimately, the issue was resolved and we were able to successfully complete as a share deal, however this is a real world illustration of how the question can arise and the real life implications of the decision.
Ultimately, the right choice depends on the specific circumstances of each client. Therefore, it is recommended for both parties to consider this prior to agreeing terms to ensure the deal works for them and to keep the above in mind whilst proceeding with the deal should any material issues arise that may change the initial preference.
For further information, please contact us at info@spiresolicitors.co.uk or call 01603 677077.
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