In buying or selling a company, you can choose to transfer either the assets or the shares. There is a distinct difference and whether you are buying or selling, it is important to understand the liabilities involved with the transaction.
Which is best, an asset sale or a share sale?
Deciding whether it is best to buy or sell the assets or shares will depend on the unique circumstances of the company, the owner and the buyer. There are many considerations to take into account, including the likely ongoing liabilities and the price.
The decision of whether to sell shares or assets only arises when the business in question is a limited company. Where the enterprise is operated by a sole trader or partnership, there will not be any shares to sell.
Buyers usually prefer to purchase just the assets of a business. This is because they can effectively leave behind any unwanted liabilities that the company may have incurred, such as onerous commercial leases, environmental issues or legal action. They can, if they choose, take on specified liabilities, such as a commercial lease, business contracts and rental agreements for plant and machinery.
The buyer can negotiate exactly which assets they want and do not have to take on employees where Isle of Man law applies as the Island has not adopted the UK’s Transfer of Undertakings (Protection of Employment) Regulations 2006.
Sellers would usually rather sell shares in the company. This is because all of the assets, obligations, liabilities and rights that the company has will be transferred to the buyer, freeing the seller of potentially unwanted issues going forward.
Because of the onerous nature of this type of purchase, it is essential that the buyer carries out in-depth due diligence investigations to ascertain the extent of the liabilities they are taking on. This should include financial and legal investigations carried out by professionals.
A share purchase can be less disruptive to the running of a business as the company’s contracts and licences will continue to run.
Business sale agreement
The terms and conditions included in any sale agreement are vitally important to protect the buyer and seller from liabilities. It is important that both parties understand the extent of what is changing hands.
In a sale, particularly in the sale of shares, the agreement will often contain extensive warranties and indemnities to safeguard the buyer’s position.
Warranties given by the seller include that accounts and other financial information are correct, shares are owned by those noted as owners, verification of the company structure, good title to assets is held, to include intellectual property and that information in respect of contracts, licences, employment and any legal disputes is correct.
The seller will also be required to give indemnities on the sale of shares. This is the agreement to compensate the buyer in respect of certain specified issues, such as a claim for environmental contamination, legal proceedings against the company or customer disputes. Indemnities are usually limited, for example, in respect of amount, time or number of claims.
The extent of any warranties or indemnities is often an issue for negotiation during the sale process.
For more information about purchasing a business and the due diligence process, see our recent article How to buy a business.
At Quinn Legal we have extensive company and commercial knowledge. If you are considering buying or selling a business on the Isle of Man we can advise you as to whether an asset or a share transaction would be in your best interests. We will also represent you during negotiations in respect of the purchase agreement and ensure that you are fully aware of the extent of any liabilities that you are taking on.