If your company is looking to sell its business, is it best to sell the assets or the shares? What’s the difference between these two methods and what are the pros and cons of each?
An asset sale is the sale of part or all of the business assets (whether owned by a company, trust, individual or some other entity) to a purchaser. This is made up of “tangible” assets such as stock, plant and equipment and “intangible” assets such as intellectual property and goodwill.
By contrast, a share sale is the sale (part or all) of the company itself by way of transfer of the company’s shares. This will automatically include a company’s assets, rights, obligations and liabilities.
Advantages and Disadvantages
The main advantages of a share sale for vendors are:
- A share sale provides you with a “clean exit” from your business. Unless otherwise agreed, all assets, rights, obligations and liabilities are automatically transferred with the shares. You are unshackled from these matters and can move on.
- If the company is used solely for the business being sold, a share sale avoids the need to liquidate the company.
- A share sale often bypasses the logistical trauma of an asset sale. In other words, there is less “admin” associated with large quantities of assets, contracts, employees, leases, licences and a host of other legal relationships. However, these matters may still require assignment and novation of contracts, assignment of leases and licences, transfers of resource consents, new employment contracts, and finance approvals.
The main disadvantages of a share sale for vendors are:
- A share sale may require agreement from all other shareholders and there may be restrictions on share transfers to third parties, such as pre-emptive rights (depending on what the shareholders have agreed to under the company’s shareholders agreement and/or constitution). By contrast, in an asset sale, a transfer of the business usually only needs the approval of 75% of the shareholders.
- Purchasers will usually require you to give warranties and indemnities, which could encompass a range of matters. For example, litigation (including potential disputes), share capital, taxation, trading arrangements, and forecasting accuracy warranties may be required. These warranties and indemnities (unless limited) could be required for a significant period of time. Your solicitor may need to hold a portion of the purchase price on trust should any breach of warranty arise. However, this will depend on the terms of the relevant sale and purchase agreement.
- The directors of the vendor company may be required to provide personal guarantees, exposing them to personal liability.
The main advantages of an asset sale for vendors are:
- You will typically have to provide fewer warranties for the sale of an asset. This avoids any potential need for a portion of the purchase price to be held on trust.
- Tax warranties and indemnities are not generally required. Unlike a share sale, you will also be able to use any tax losses to offset tax liability arising from the sale of the assets.
- You can exclude any assets you wish to retain. This allows the parties to “cherry pick” what assets and what liabilities are transferring to the purchaser. If you wish to retain certain assets, it is easier to exclude these from an asset sale than it is in the case of a share sale.
The main disadvantages of an asset sale for vendors are:
- To a large extent, each asset must be treated separately resulting in more “admin” (e.g. arrangements made for contracts, leases, and licences to be transferred with the relevant asset to the purchaser).
- A transfer of assets will require the consent of third parties who may withhold their consent to assign or novate contracts. This may ultimately mean that the buyer is unable to purchase your business.
- Employment relationships will need to be terminated upon completion. This means you are solely responsible for all redundancy, severance or other amounts due and payable to employees of the business calculated up to and as at settlement. This includes accrued employee entitlements such as holiday leave.
- You must obtain releases of any security interests affecting the assets of the business from the applicable financiers prior to the completion date.
- All real and potential liabilities will remain with you and do not transfer to the buyer.
- If the sale is not a ’going concern’ or no interest in land is involved, the vendor will have to pay GST.
Talk to an Expert Before You Agree To Sell
If you or your company is looking to sell its business, the best method of sale will be dependent on your circumstances and the level of risk the purchaser is willing to assume. Before you agree to a certain method of sale, talk to an expert about your circumstances so they can help you navigate the maze of legal ramifications involved in a sale and minimise your risk.
If you are looking to sell a business please do not hesitate to contact Dan Chisholm, Senior Associate (03 343 8581 / email@example.com) or Ricki Allan, Solicitor (03 343 8585 / firstname.lastname@example.org).