Share sale vs asset sale, advantages and disadvantages comparison

The most common way for industrialists to exit their businesses is to sell them. Whether you’ve been planning to sell your business or just want to retire, it’s important to think ahead so you can get the best price and avoid unnecessary stress, as selling a company can be time-consuming and complicated.

Here are the different ways to sell your business, the circumstances, and the possible impacts.

Different ways of selling businesses

When selling a private limited company (we will discuss the sale of other types of businesses below), possible ways to sell: sale of company shares and sale of company assets.

The share sale involves the buyer acquiring all the shares of the company, the company continues to function normally, and the buyer acts as the new owner. An asset sale involves a buyer acquiring all or certain assets of the company, and they may also assume certain liabilities related to those assets. The target company is usually dissolved after the sale of assets.

As the first step in choosing any of the above options, there are many things to consider:

  1. Do you have permanent ownership or leasehold property? What other assets, such as trademarks and patents or customer lists, will form part of the business to be sold, and what assets may you retain after the sale?
  2. Have you made a professional assessment of your business?
  3. Are your business records up-to-date and have you recently performed important internal administrative tasks such as property maintenance and inventory?
  4. Are you in good relationship with the bank, are your payments and other liabilities (e.g. taxes) up to date, and how much remains to be processed and repaid?
  5. When deciding how to structure a transaction, have you heard advice on tax issues that may have arisen?

In addition to obtaining a professional valuation, consider hiring intermediaries, accountants, and lawyers early in the process so that they can provide you with the best way to structure your sale and the best way to go to market. You also need to carefully consider the tax implications of selling shares versus selling your company’s assets so that you can make the right choice.

Sale of shares

When you sell your shares in a company to a purchaser, the new owner gets the entire company, including all of its assets and liabilities (property, employees, contracts, etc.). As an industrialist, stock sales are a complete break for you and minimize the hassle of dealing with every asset. On the other hand, the purchaser of the company’s shares will require you to give it broad guarantees and indemnifications in the sale and purchase agreement to protect it from any risks inherent in the bundle of assets and liabilities contained in the sale.

Advantages of a share sale – from the seller’s point of view:

  • Since the owner of the assets (the company itself is a legal person) remains the same after the sale, you do not have to transfer each asset (if it is a permanent ownership or long-term lease) or deal with the landlord (if it is a shorter commercial lease) and obtain consent (and possibly pay an administration fee).
  • You can keep the details of your company’s sale secret, at least in the early stages. You don’t need to tell customers and employees that you’re thinking about selling your business and avoid the personnel impact and any anxiety that can result.
  • Any existing contract that you have as a supplier or purchaser will generally continue to be valid after the sale.
  • Employees are automatically transferred and have no obligation to negotiate with employees.
  • The seller achieved a complete break with the company and any responsibilities.

Disadvantages of equity transfer:

  • At the time of sale of shares, the sale and purchase agreement will contain guarantees and indemnities in favor of the buyer, so any liability that arises after the sale, or that cannot be accurately quantified at the time of sale (such as pending litigation), will be the seller’s responsibility. These negotiations can be time-consuming and complex.
  • The due diligence process – which requires an assessment of the scope of a company’s pre-sale assets and liabilities – can be delayed and you may need to set up a data room with all your relevant documents and records.
  • You will need to review all of the Company’s contracts to see if they contain a change of control clause that requires you to obtain the consent of the other party to sell the shares.
  • Shareholders may be required to pay profits tax on any profits you make during the period you own the shares.
  • The selling shareholder must agree to the sale.

Asset sale

In an asset sale (the sale of company assets instead of shares), the sale process is less risky for the buyer. The buyer (or buyer) will take ownership of the personal assets, making the company a “shell” and then closing after the sale.

Which assets to purchase depends on the contract between the buyer and the seller. The following are the most common assets sold as part of an asset sale transaction:

  • Customer records
  • Plant & Machinery
  • Raw material tools
  • license plate
  • fitment
  • Inventory
  • Business contracts
  • intellectual property
  • IT systems and software
  • trademark
  • Exclusivity

Advantages of asset sale:

  • Buyers can choose which assets form part of the transaction or leave some assets behind.
  • As the buyer’s risk decreases, the time and expense of negotiating complex warranties and compensation will decrease. Buyers are aware of what rights and responsibilities come with each asset and can more accurately assess their risks at the time of sale.
  • The due diligence process may be shorter and less involved than selling shares.

Disadvantages of asset sale:

  • Since you will be closing the company, you will be transferring property and assets, so you will need to contact a third party regarding the sale – which may have a negative impact on business operations.
  • The appointment of employees requires independent consultation.
  • Contracts with suppliers and customers are not automatically transferred and must be negotiated separately with the relevant third parties.
  • The title or lease of the property at each of your business premises will be transferred separately and separate negotiations and relevant documents will need to be prepared.

Sell different types of companies

Although the sale of a private limited company is the most common form of commercial sale, here is a quick look at the sale process of the other two types of organizations – unlimited companies and limited companies.

Unlimited companies

If you run your business as an unlimited company, whether sole proprietorship or a partnership, selling the business will involve the sale of assets rather than shares.

Selling a partnership can be more complicated than selling a limited company because the assets may be held by different partners and the partners may have different identities. For this reason, some entrepreneurs decide to consolidate their holdings before selling so that the transaction can go smoothly.

When you sell a partnership, you need to consider the following questions:

  1. Who owns each asset group? Consider each asset class separately, such as property, goodwill, intellectual property, etc.
  2. How are the holdings of the partnership divided and how are the proceeds apportioned? This may affect the gains realized from buying and selling.
  3. Will all existing partners withdraw from the business or will they continue to do business?

Public Limited Company (PLC)

Since the public can buy and sell shares of PLCs, PLCs are subject to a regulatory framework that governs how these stocks are traded.

There are six general principles that apply to their stock trading:

  1. When purchasing shares, all individuals holding PLC shares must be treated equally. If the buyer acquires a controlled number of shares in the PLC, the rights of the minority shares must be protected.
  2. All shareholders must be given enough time and information to enable them to make an informed choice about whether to sell their shares.
  3. PLC’s board of directors must consider the best interests of the company and let individual shareholders decide whether the bid is sufficient.
  4. The PLC stock market may not be manipulated in any way that could create a false market.
  5. Bidders for PLC shares must ensure that they are able to pay the tender fee.
  6. The PLC as a tender must be able to conduct business normally, taking into account any pending bids for its shares.

The main differences between selling a PLC and a private limited company are:

  • The purchaser of any shares will not receive the same type of warranties and indemnities as a private sale.
  • The due diligence process for selling a PLC may not be as detailed and fast as the sale of a private limited company.
  • For PLCs, private exclusivity arrangements are less likely (specific buyers are given the option of pre-emptive purchase) as these are prohibited by the Code.
  • Purchasers of PLC shares generally cannot impose conditions on their offer to purchase shares.
  • The buyer is required to determine the purchase price before the sale, including a fully committed bank loan (if applicable).
  • All sellers of PLC shares need to be treated equally, with no one giving preferential prices or other special arrangements.
  • Once the purchase of shares in the PLC is officially announced, the buyer is obliged to enter the offer phase. Keep it confidential before announcing the offer so as not to affect the trading of PLC shares.

When announcing a takeover, details about the nature of the offer and the identity of the offeror must be sent to the shareholders of the PLC. In the case of a contractual takeover offer, a bidder who successfully acquires a certain percentage of PLC’s shares may be able to force the acquisition of a minority stake in the remaining company. If the proposed acquisition fails, then bidders will usually be prevented from bidding again for at least a year.

Sometimes buying PLC shares increases their holdings in the target company before they make an offer or during the offer process. Detailed legal advice should be taken to avoid the risk of insider trading claims, or to establish the risk of causing the buyer to acquire 30% or more of the total voting rights, as special rules apply to such incremental purchases.

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