So, you’ve made what is probably the most difficult decision a business owner has to make – to exit the business. Now what? There is honestly no substitute for early, pragmatic, professional advice but before taking that step it is worth understanding and considering all the variables:
- Is the sale going to be of the shares in the company that owns the business or just the business assets themselves?
- How will the sale consideration be received – cash, earn-out, loan notes or shares?
- Are you entitled to Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief, before April 2020?
Share Sale or Asset Sale – what’s the difference?
There are two common ways of transferring the business to new ownership, share sale or asset sale.
Ultimately the choice of which method will be selected will be influenced by legal, financial and personal considerations of the buyer as well as the seller.
The key difference between the two is in the nature of what a potential buyer acquires:
In a share sale, the buyer acquires the shares of the company that owns the trade and assets of the business. The business can continue to run on a ‘business as usual’ basis. The new owner of the company acquires all assets, liabilities and obligations – even those a prospective buyer may not know about!
In an asset sale, the buyer acquires the assets which make up the business. This is where the buyer acquires the assets, both tangible (property, land, machinery and stock) and intangible (intellectual property and goodwill).
Generally speaking, a share sale is typically more attractive from a tax perspective to a seller than to a buyer. Whereas an asset sale will often be more tax-efficient for a buyer than a seller. However, following recent tax changes, the benefit to the tax benefits to the buyer of buying trade and assets are less than they used to be.
Also, an asset sale will also allow a buyer to leave behind parts of the business they consider too risky and not to take on past tax obligations.
The seller’s pros and cons
- A share sale transaction is simpler for the seller than an asset sale as the company is sold as a ‘going concern’ in totality.
- It is a more discreet sale as the business will carry on as usual after the sale.
- The buyer of shares buys a company ‘warts and all’, so will inherit any problems that exist at the date of the sale.
- It is usually more tax-efficient for the seller than an asset sale.
- A share sale involves a greater risk for the buyer than an asset sale because of the level of liabilities the buyer may be exposed to.
- The buyer will, therefore, expect the seller to give extensive warranties and indemnities as protection against unknown liabilities.
- A buyer may apply a discount to reflect the increased risk.
- An asset sale generally involves the buyer in fewer risks and therefore the contract and transaction are more straightforward.
- The seller is your company and so any warranties or guarantees you give are given by your company, not you personally. Unless there is an express arrangement to the contrary (which is likely!).
- You can retain parts of the business of value to you or even sell to a different purchaser at a later date.
- It is generally not as tax-efficient for the seller as a share sale, as there are two layers of tax.
- The sale may be logistically more complex than a share sale. You will need to ensure that all the different parts of the business are legally transferred including any properties, employees or contracts. This may involve quite a bit of work on your part.
- The buyer may ‘cherry-pick’ the assets they wish to acquire.
- The company will still be yours at the end of the transaction and you will need to deal with this properly e.g. by winding the company up (if appropriate) and paying all existing liabilities and debts and disposing of the retained assets before taking the net cash proceeds.
Planning is everything
Before embarking on the sale process:
- Get your business in the best possible shape it can be. This will probably mean appointing an adviser 12 to 24 months beforehand to help you prepare your detailed exit plan.
- Consider if you want to make a ‘clean break’ or continue to be involved with the business after the sale. Consider what will be viable in the eyes of the buyer.
Consider the typical types of consideration (cash, shares, loan notes or earn-out).
- Are you eligible for Business Asset Disposal Relief?
- Don’t go it alone, appoint an adviser with a solid track record of selling businesses who can guide you through the process.
- Appoint a lawyer (selling a business is a legal minefield with many traps awaiting the unprepared) but only do so at the appropriate time – you may have to ‘kiss a number of frogs’.
Please Note: This blog should not be considered as advice from Isosceles. Always seek professional advice specific to your circumstances.