Share Purchase or Asset Purchase

Expanding your business can be done in many different ways, one obvious option is the purchase of other businesses or assets. Such acquisitions can be horizontal i.e. at the same level, so if your business is a manufacturer then purchasing another manufacturer. Vertical i.e. if you are a manufacturer then buying a distributor etc. Finally you may diversify by purchasing a business in a different market.

As with any purchase (business or otherwise) once you have identified the type of acquisition you require you should find an appropriate target and assess its value. Consideration should be given to the reason for selling, profit levels, assets, dividends, potential (market increases for example) etc.

When it comes to actually buying the business there are two ways: share purchase i.e. buying shares in the company that owns the business / assets or business / asset purchase i.e. buying the assets that make up the business. With a share purchase company shares are transferred to the buyer by means of a stock transfer form however in a business / asset purchase the transfer document required will vary. The two methods are inherently different on a share purchase one acquires a company that is running a business hence it acquires a going concern. Contrast this with a business / asset purchase where effectively you may end up owning parts of a business. Should you wish to own the business as a going concern you must ensure that agreements with suppliers, landlords, customers etc are all assigned.

Consider the following issues:

Liabilities – by way of a share purchase the seller escapes a large amount of liability, in effect the seller is only liable as far as the warranties and indemnities it has provided in the share purchase. As a buyer you may therefore prefer to go down the business / asset purchase route where by you can pick and choose the assets you need thus avoiding particular liabilities for example product liabilities etc.

Tax – the seller in a share purchase may benefit from roll over relief, for a buyer stamp duty is charged at 0.5% (compared to 4% for asset purchases including land and buildings), trading losses can be carried forward and held against future profits. In a business / asset purchase buyers may claim capital allowances, the base cost (for CGT purposes) is likely to be lower than in a share purchase, capital allowances can be utilised etc.

Sale type – the sale may be for a division of a business as opposed to the business as a whole as such an asset sale is by far the most practical option.

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