Selling a business – share sale vs business sale

Selling a business will typically adopt one of two structures – being either a ‘share sale’ or a ‘business and asset sale’. The two are very different both legally and from a tax perspective. 

Business and asset sale

Business and asset sales tend to be more straight-forward from a legal perspective. The agreement is much shorter, compared to a share sale agreement. But from a practical viewpoint, business sales can involve more work for the buyer after (and sometimes before) legal completion of the sale, and the transfer process can be a little disruptive to the smooth running of the business. In some cases, given the choice, minimising regulatory hurdles or avoiding potential difficulties such as transferring important consents or industry accreditations, can be a reason to favour a share sale over a business and asset sale. There is comparatively less disruption with a share sale where the key change is to the company’s shareholders. The process does not (generally) alter anything to do with the relationships between the company entity and its customers or suppliers. There are some exceptions to that but most can be easily dealt with.

In almost all cases where a business operates through a limited liability company, the owners will usually have a strong preference for effecting a sale by selling their shares. Very often this is the most tax efficient route, with tax rates being as low as 10% on any capital gain provided ‘Business Asset Disposal Relief’ (which is a current tax relief) applies in full. In contrast, the sale by a company of its business and assets will put the purchase price in the company’s coffers, and potentially subject to corporation tax on top of any taxes incurred when the money is extracted by the shareholders.

Business and asset sales can sometimes be difficult to avoid, especially where selling a part of a business and not the whole thing. That being said, planning and careful structuring of your business can help to avoid limiting your options.

Share sale

With operational simplicity of a share sale comes commercial risk, since a purchaser of shares will acquire the company ‘warts and all’. By acquiring shares, the buyer purchases the company with all of its assets and all of its liabilities, including tax liabilities, whether the buyer knows about them in advance of the purchase or not. Buyers will usually want protecting from this, which is the main reason why the share sale process and the share sale agreement is far more complicated from a legal perspective. In particular, the buyer needs to ensure certainty about exactly what they are getting for their money, and for that reason the legal agreement should include terms to clearly define what that is. There are two mechanisms to achieving that. The first is to do with the price and describing how that should increase or decrease depending on what the company’s finances are at the point of completion. The second buyer safeguard comes in the form of promises by the seller to the buyer about the financial and operational wellbeing of the company (ie the warranties and indemnities). A breach of those promises may enable the buyer to recover some of the purchase price. Business and asset sales will also include warranties and indemnities, but these will tend to be short compared to a share sale transaction.