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Share Purchase vs Asset purchase - what is the difference?

If you are planning to buy a business, you will need to consider the different approaches open to you, namely a share purchase or an asset purchase (‘asset transfer’). There are advantages and disadvantages to both and by properly understanding them, you can make the right choice for your situation.

In this blog, we will cover:

  • Share transfers
  • Asset transfers
  • How to decide whether a share purchase or an asset purchase is right for you

Please note, the information in this blog should not be taken as legal advice. For specific help with any corporate law matters, please speak to one of our Corporate & Commercial team by calling us on 01689 887 887.

Share transfers

If you purchase all or part of the shares in a company, you will buy the whole company or a stake in it. This includes the assets as well as the liabilities and obligations that the company has. Even if you are not aware of the full extent of the liabilities and obligations, you will still take them on and be responsible for them once the purchase has been completed.

For this reason, a share purchase should involve a large amount of due diligence work before it completes. Your solicitor will also work to protect your position as far as possible by including warranties and indemnities in the purchase agreement.

Asset transfers

With an asset purchase, you will not take on all liabilities in the same way as a share purchase. You may pick and choose what assets you would like to acquire and will have more control over what you take from or what liabilities you assume of the existing business.

Assets that can be purchased include stock, machinery, contracts and the goodwill that the business has built up. Land is also considered an asset to the company and can be purchased.

In some ways an asset purchase can be more like starting a new business as the original company that runs the business will still exist, with the new owner of assets taking the business forward.

Deciding on a share purchase or asset purchase – common questions to consider

What are the advantages of an asset transfer?

The advantages of an asset transfer in a business purchase include avoiding unknown liabilities as these can be excluded in the purchase agreement, though care must be taken to deal properly with certain liabilities.

You can select the assets that you want and purchase only those. This still gives you the option to purchase intellectual property and the essence of a brand, such as its name and online presence, while leaving other onerous assets behind.

What are the drawbacks of an asset transfer?

 A drawback of an asset purchase can be that every category of asset has to be considered individually. This can take time in some cases and may also require the participation of a third party. In some cases, where the third party is not in agreement, it will not be possible to transfer an asset, such as a contract, with restrictions on assignment, particularly in the case of leases.

When buying assets of a business there is therefore a risk that there could be some disruption to the day to day running of the business while the changeover takes place.

What happens to employees on a share purchase and an asset purchase?

Employees will be transferred on both a share purchase and an asset purchase. On an asset purchase, it will be necessary to consult with them and follow prescribed procedures in accordance with the TUPE regulations. As the buyer of assets, you will be responsible for the employees from the date of the transfer onwards on the terms on which they have been employed, but their previous employer will be liable in respect of any specific agreed provisions and warranties included in the purchase contract.

It is important to ensure that the requirements of TUPE are fully met, or you could face claims from employees and be required to pay them compensation, and it is common to deal with employment respects specifically in the transfer agreement.

What are the advantages of a share transfer?

With a share purchase, the transfer will usually be fairly smooth, with all existing contracts and liabilities simply carrying on within the company and administered by the new owner. A robust share purchase agreement should ensure that the seller retains responsibility for certain existing obligations, through warranty and indemnity cover.

Are Stamp Duty and VAT payable on the purchase of a business?

Stamp Duty of 0.5% of the value of the shares is payable on a share purchase when the purchaser is not from the same business group. Most assets are exempt from Stamp Duty when transferred, with some exceptions, such as the purchase of land and buildings, where Stamp Duty Land Tax arises.

VAT is not payable on a share purchase. On an asset purchase, it may be payable unless the business is transferred as a going concern.

Speak to our corporate lawyers in Orpington, Kent about asset and share transfers

In choosing between the types of business purchase methods, you are strongly advised to seek professional advice as deciding whether to carry out a business purchase by way of an asset transfer or share transfer is not always straightforward.

Our Corporate Law team have in-depth understanding of the advantages and disadvantages of each and can answer your questions and discuss the process with you. If you need help with asset transfers, share transfers or any other corporate law matters, we can provide comprehensive advice.

To speak to one of our Corporate Law team, call us on 01689 887 887.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
Although correct at the time of publication, the contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.