Lifecycle of a business – I want to sell my business: Share sale v asset/business sale?
Setting up and running your own business is an amazing achievement. It requires vision, creativity, motivation and stamina. On occasion, it can even bring you fame, riches and fortune. But it can also result in reams of paperwork and cause sleepless nights. And as someone once said to me about children “It doesn’t get easier, it just changes”, so the same can be said for your business throughout its lifecycle. From setting up to exit, it will force you to consider issues that you might not previously have known anything about and it will need you to make many decisions, sometimes very quickly. What it certainly is not is mundane.
With this in mind, the corporate team at Forsters, together with some of our specialist colleagues, has written a series of articles about the various issues and some of the key points that it may help you to know about at each stage of a business’s life. Not all of these will be relevant to you or your business endeavours, but we hope that you will find at least some of these guides interesting and useful, whether you just have the glimmer of an idea, are a start-up, a well-established enterprise or are considering your exit options. Do feel free to drop us a line or pick up the phone if you would like to discuss any of the issues raised further.
We’ve considered the main aspects of the lifecycle of a business from the beginning and you now want to sell….
I want to sell my business: Share sale v asset / business sale?
In the UK, the sale and purchase of a business can take one of two forms: a share sale or an asset / business sale. Which one you opt for will depend on various factors, including tax, the bargaining position of the parties, the reason for the sale, and so on.
This article briefly explains some of the key differences between the two options. For simplicity, we’ll assume that the company which runs the business is a private company limited by shares and that the purchase price is cash.
It’s worth noting that tax is often the key driver behind the structuring of any transaction. Although beyond the scope of this article, the parties should always seek specialist tax advice to ascertain the various tax implications that will arise on both a share sale and an asset sale.
Back to basics – who owns what?
In England and Wales, a company is a legal entity in its own right. This means that it can sue and be sued, own assets, and owe liabilities, in its own name.
The company is in turn owned by its shareholder(s) who each hold one or more shares in the company. The directors run the company on a day-to-day basis and are responsible for its management. They may or may not also be shareholders.
Share sale and asset sale: what’s the difference?
In a share sale, the buyer acquires the entire issued share capital in the company which runs the business (the target company) from the target company’s existing shareholder(s) (the seller(s)). As such, the purchase agreement (the share purchase agreement or SPA) will be entered into between the buyer and the existing shareholder(s); often, the target company will not be a party to the SPA at all. Essentially, the buyer is acquiring the entire business within a corporate / company wrapper. To an outsider looking in, there is no change to the actual business itself (i.e. the assets remain owned by the target company, any liabilities are still owed by the target company, any contracts that the target company has entered into remain in place and any employees remain with the target company), although it is common for the buyer to change the name and registered office of the target company and to change the directors.
In an asset sale, the buyer acquires a bundle of specified assets and rights, and it may assume responsibility for certain liabilities and obligations, which together comprise the business. As it’s the company which owns those assets, rights, liabilities and obligations, the purchase agreement (the asset purchase agreement or APA) will be between the buyer and the company (as the seller). Asset sales allow the buyer to cherry pick which assets (and possibly liabilities) it wants to acquire.
Pros and cons
Share sale
As a share sale effects a change in ownership at the level above the operating business (i.e. in the owner(s) of the shares in the target company), it enables the business to continue to operate without any disruption. There’s no need to transfer the individual assets and usually, no third party consent is required (unless any contracts include change of control provisions). As such, the sale can often remain confidential and a buyer can continue to benefit from any goodwill or reputation in the business. However, if there are a number of seller shareholders, they will all need to be on-board with the sale, and agree to and sign the SPA, which can result in added complexity.
A share sale can also provide the seller(s) with a clean exit (although in some transactions, a seller who is particularly important to the business, may retain some interest and involvement and the seller(s) is likely to be on the hook for any breach of warranty or indemnity claims for a period of time post-sale).
From a legal documentation point of view, a share sale can be more straightforward than an asset sale: it doesn’t require the transfer (novation) of any contracts required by the business from the seller to the buyer, nor does it require the parties to agree which assets and liabilities are being acquired and their individual purchase price.
That said, because the buyer will be acquiring the entire business, warts and all, it is vital that the buyer does its homework and fully understands exactly what it’s buying. This exercise is referred to as due diligence, which is usually split between legal due diligence (completed by the buyer’s legal advisors), financial due diligence (completed by the buyer’s accountants or financial advisers) and commercial due diligence (completed by the buyer).
The aim of any due diligence exercise is to ensure that the buyer fully understands the business it’s buying and can make plans as to how this new business can be integrated into any business the buyer already owns. It also helps to flush out any skeletons in closets. This obviously creates risk in that the buyer could find out certain information which puts it off buying the company in the first place. If this happens, the buyer has various options; for example, it could:
- negotiate a lower purchase price with the seller
- request the inclusion of certain indemnities so that the seller will have to reimburse the buyer for any loss suffered in respect of specified events or liabilities post-completion
- retain part of the purchase price for a period of time post-sale to cover any claims it might have against the seller post-completion
- choose to walk away from the deal
- request that the transaction be restructured as an asset sale
Asset sale
With an asset sale, both parties are afforded more flexibility in terms of what they sell and acquire, than in a share sale; for example, the seller may want to retain certain assets or parts of the business, while the buyer may want to exclude undesirable assets or liabilities, thereby reducing its risk exposure.
However, this flexibility comes at a cost and an asset sale is often more complex than a share sale due to the need to identify and transfer each of the separate assets which are being sold. As the company itself is the seller, any contracts which the company has entered into which are being transferred to the buyer will require the approval of the other party to the contract. Any licences related to the business will also need to be transferred and any security which has been granted over any of the assets being sold will need to be released. Obtaining these approvals can prolong the transaction and make it more difficult to keep the transaction confidential.
Due diligence will still be required, to enable the buyer to determine what it actually wants to purchase and to ensure that any contracts, licences, etc. are dealt with accordingly, but it may not be as all-encompassing an exercise as for a share sale.
Fewer warranties and indemnities are usually given on an asset sale than a share sale (an advantage for the selling side), and it will be the seller company, rather than that company’s shareholders, which actually give them. This substantially reduces the shareholders’ liability risk (although the buyer may insist on certain individuals giving additional protection, such as personal guarantees).
A significant issue arises in asset sales where the business has any employees. These may transfer under TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006) (thereby cutting across the “cherry picking” benefits to a buyer of an asset sale). This can be complex and it’s vital that the correct procedure is followed, so specialist employment law advice should be taken if an asset sale is being undertaken and there are any employees in the business.
Finally, don’t forget to consider where the purchase price will end up. In a share sale, the purchase price will be paid to the seller shareholder(s), whereas the purchase price on an asset sale will be paid to the selling company; that company’s shareholders will then have to decide how to move the cash out of the company. Legal and tax advice should be taken about this.
Conclusion
The structure of any business sale needs to be carefully considered by both sides to the transaction. There are advantages and disadvantages to both methods and although this note summarises a few of these, we recommend that legal and tax advice should always be taken as soon as possible if you are considering selling or purchasing a business.
If you have any queries about the above or wish to discuss your exit or an acquisition in more detail, please get in touch with your usual Forsters’ contact or any member of the Forsters’ Corporate team.
Disclaimer
This note reflects the law as at 1 July 2025. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
