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Selling or Buying a Business: Assets or Shares?
Published in
April 2024
So, you’ve found a business you are wanting to buy, or you’ve found a buyer for your business. What next?
The next step is to start the legal process. The first stage of that process for both a seller and a buyer is the same:
- If you are buying, are you buying the assets or shares of the business?
- If you are selling, are you selling the assets or shares of the business?
While the importance of getting this question right from the outset is sometimes overlooked, it is crucial to make sure you have structured the sale or purchase business for the outcome you need, and to understand the implications of getting it wrong.
The basic differences
Assets are often seen as the tangible items within a business used for its operations, for example typical assets could include, stock and inventory, vehicles, land and buildings, cash on hand, equipment, etc. However, the assets of a business can also include non-tangible things, such as intellectual property and rights under a contract. The purchase of all the assets of the business theoretically results in the buyer being able to utilize those assets in the same way they have previously been used and allows the buyer to continue to operate that same business.
On the other hand, shares of a business reflect an ownership interest in the underlying company that operates the business. In general, the more shares you own, the more of a say you can have in the management and running of the business. The purchase of all the shares of a company generally confers complete control over the running and management of the company. However, the company remains the owner of its business assets. The buyer therefore steps into an already established business.
Why does it matter?
While this article does not traverse every advantage or disadvantage of choosing an asset or share sale/purchase structure, the key considerations are:
- Existing or pre-existing obligations or liabilities: The purchase of shares means the purchase of a company/business as it stands with all its blessings and flaws. Focusing on the “flaws” the reason why buyers are often apprehensive regarding share purchases is because of they are taking over all of the history of the business, good and bad. As a result, the new owner will inherit all the previous issues of the business (if any).
- Practical and administrative issues: The purchase of shares can often save a buyer and seller from the potential practical and administrative challenge of asset transfers. That is, in a share sale/purchase, rather than the transfer of all assets (which may require assignments, novations, consents and approvals, new contracts, etc), the parties just need to transfer shares which can be completed in a few documents.
- Approaches to the underlying sale and purchase agreement: The option of either an asset or share transaction has a profound impact on a party’s approach to negotiating the underlying sale and purchase agreement, and/or undertaking their core due diligence of the business. For example, a share transaction may require extensive warranties and indemnities as to a business’s history.
- Transaction type: An investor buyer who is just looking to add a well-established and self-sufficient business into their portfolio and isn’t wanting to be too involved in the management or day-to-day of the business will likely purchase shares. A new business owner who is wanting to actively run, manage, and “reinvent the wheel” of that business may look to purchase its assets only. That option allows the buyer to potentially omit underperforming or obsolete assets from the deal.
Drawing the threads together
Ultimately, it is viable to buy/sell a business either by way of an asset or share transaction. However, the choice of option may result in important nuances that dictate your approach to the next stages of the transaction.
For more information or to discuss the sale of your business or the purchase of a new business, please contact us.
This article forms part of a series of articles which aim to provide a general and rudimentary guide to purchasing and selling a business. Look out for our next article about the next step - the sale and purchase agreement.