Asset Deal or Share Deal – What’s the Difference?
Clients often call us to discuss plans to buy a business. They are focused on the economic benefits that will flow from the deal, how they will fund it and how they will deal with all the practicalities.
Something they haven’t always thought about is whether it’s better for them to do an asset deal or a share deal and many are not entirely clear as to how these differ. Both routes satisfy the commercial objective in that the target business is acquired but they are very different in practice and have both advantages and disadvantages for a buyer.
1. What’s the difference?
In a share deal the buyer buys the shares of the company that owns the target business. The shareholders of the company will enter into a contract with the buyer and as result of that, the buyer gets the company and all its assets, liabilities and obligations – both historic and future.
In an asset deal the buyer buys selected assets, liabilities and obligations from the company or other person that owns them. That allows them to pick and choose exactly what they want.
It’s like agreeing to buy a bag of shopping from someone. If you agree to buy the whole bag, you get the bag and everything in it – that’s like a share deal. The alternative is to agree to buy just the apples, pears and bananas and let them keep the bag and whatever else is in it – that’s like an asset deal.
2. Why do we care?
There are some obvious advantages and disadvantages in both routes for buyers:
i. Choice – on an asset deal buyers can pick and choose what assets and liabilities they want to take on, leaving what they don’t want behind. That way risks can be minimized. On a share deal there is additional risk because the buyer gets everything “warts and all”. Extensive due diligence is needed to mitigate that risk.
ii. Tax – on an asset deal tax breaks may be available depending on the assets being bought however if the deal does not qualify as a transfer of a going concern, then VAT will be payable on the purchase price. No VAT is payable on a share sale. If there is any property to be transferred as part of an asset deal, the stamp duty payable will be higher than the 0.5% paid on share transfers.
iii. Complexity – on an asset deal each asset has to be individually transferred meaning that consent or registrations may be needed which can impact on timing. On a share deal this isn’t required unless there is a specific change of control clause in a contract.
iv. Confidentiality – having to seek lots of consents for an asset deal can make it hard to keep things under wraps meaning news may leak before the deal is done. This is easier to control on a share deal.
v. Seller preference – often sellers want to do a share deal to avoid double tax. On an asset deal the company is taxed when it sells the assets and then the shareholders are taxed when the profits from the sale are distributed to them. If the shares are sold, then the sellers only pay capital gains tax on their profits. Also, sellers often want a clean break and selling the company is the easiest way for them to achieve that. That being said if there is a good reason for an asset deal and the buyer has a strong negotiating position, then sellers can be persuaded.
The choice made can have real impact. For example, we had one client who was doing a share purchase of a company that was over 100 years old and had occupied the same factory for all that time. Buying the company meant they took on all the environmental issues and liabilities relating to that site, including any clean up required – who knows what went down the drains 100 years ago! The risk was too great for the buyers, so the sellers agreed to switch to an asset deal. That meant a delay while the buyer applied for all the required licences and permits but the deal got done and everyone was happy.
The right choice will depend on the specific circumstances for each client but before agreeing to what the sellers suggest buyers should give some careful thought as to what works best for them. If you need advice on your specific circumstances, contact our Corporate Team.