What Should I Buy? Shares or Assets?

 Are you considering buying a business?
Do you know and understand the implications of purchasing assets vs shares?

As a prospective buyer, you are able to buy shares in the company or the assets required to undertake the business. The shares are purchased from the shareholders of the company whereas the assets are purchased by the company which undertakes the business. If the business is run by a sole trader or a partnership then there will be no shares to buy (i.e. you would purchase the assets).

Assets of the business include (among other things) plant and equipment, goodwill, business contracts, licenses and approvals. Generally speaking, a buyer will normally prefer to buy the assets of a business and the seller will prefer to sell the shares.

It is highly recommended that the decision to buy or sell shares or assets be made early on in the transaction. Substantial fees can be incurred if a change is made midway through the transaction. Please contact Allied Legal’s commercial lawyers in Melbourne if you are considering such a transaction.

The Buyer’s Perspective

A buyer will generally prefer to buy the assets of a company.  This enables the buyer to identify and pick exactly which assets to purchase and liabilities to accept.  The balance of the assets and liabilities remain with the seller.  A key advantage from the buyer’s perspective is that unidentified risks and liabilities do not flow to the buyer.

 

A share sale transaction sees the buyer takeover the company in its entirety, making thorough due diligence critical.  The buyer has the ability to protect itself by way of warranties from the seller.  However, such protection could be useless if the seller “goes broke” (the buyer may seek part of the purchase price be held back as security against unwelcome undisclosed liabilities after completion). Recovery pursuant to warranties and indemnities is not always ideal as (among other things) it can result in significant legal fees.

The Seller’s Perspective

From a seller’s perspective, a sale of shares achieves a clean break in the relationship between the selling shareholder and the company.  This is the primary reason why sellers usually prefer a sale of shares.  Having said this, a well-advised buyer must seek protection for certain risks by way of warranty and indemnity protection.   This ensures that the seller is required to compensate the buyer for potential liability associated with certain risks (usually for an agreed period of time following the sale and capped at a certain agreed dollar limit).

If there is an asset sale, then, generally speaking, the seller continues to accept liabilities associated with the shares in the company.

When Might A Buyer Prefer The Purchase Of Shares?

The following are some of the reasons a buyer would prefer a purchase of shares over assets:

  1. Tax implications (including securing tax losses).
  2. To secure the transfer of otherwise non-transferable contracts and licences. This could include the lease agreement relating to the business premises.
  3. To preserve customer relationships. An asset sale requires each contracts to be individually assigned to the buyer.
  4. There may be commercial reasons for not wanting to alert third parties about the change of ownership.

Contact Aperion Law

Buyers and sellers will note that there are both advantages and disadvantages associated with both share and asset sale transactions.  The content of this article should strictly be treated as an introductory guide to some of the issues associated with asset and share purchases. Aperion Law's commercial lawyers in Melbourne and Sydney can help and guide you through the process and advice you on all the issues.  We provide free 30-minute initial consultations to help understand your needs.  Please contact us when you are ready to seek specialist advice: https://www.aperionlaw.com.au/#find-us