Whether you’re looking to release funds for other investment, refocusing on more profitable areas of your business, easing financial pressures, or selling up all together, there are two potential ways in which your deal could be structured: an asset purchase or a share purchase.
This article will compare the two and cover some of the essential things to consider in both situations.
What is an asset purchase?
An asset purchase is the transfer of certain assets related to a business. Essentially, parties can pick and choose which assets form part of the sale.
It could be the sale of:
- Business information and records
- Information technology and IT systems
- Intellectual property rights
- Plant and machinery
- Land, buildings, or premises
- Trading stock
An asset purchase may be required if there are difficult shareholders who are not prepared to sell their shares.
It may also be an attractive option when a company enters administration or liquidation as the buyer can avoid, to a certain extent, taking over responsibility for the creditors or other liabilities.
Pros and cons of an asset purchase
- The buyer can choose which assets and liabilities it acquires and those to leave behind.
- The transaction is much quicker than a share purchase transaction.
- There is generally much more control and negotiating power in an asset purchase transaction.
- The seller benefits as the transaction is unlikely to require the consent from the other shareholders.
- The transaction process is more complex and therefore involves more documentation.
- Buyers must ensure the transaction complies with the applicable employee protections.
- The seller may be left with assets which the buyer does not want to take on.
What is a share purchase?
A share purchase involves the purchase of all (or a majority) of the share capital of the company from its shareholders. Essentially, the buyer will acquire everything owned by the company, including its liabilities.
This transaction would generally suit a seller which wishes to sell the entirety of their business.
Pros and cons of a share purchase
- The seller can make a clean break from the business and its liabilities.
- This transaction brings more peace of mind to both parties.
- The transaction process is much longer and involves greater risk.
- Depending on the number of shares involved in the transaction, the other shareholders may have to agree to the transaction.
- There is a greater need for due diligence – which can be a lengthy job.
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