This is a follow up to my post “The bigger picture – selling your business”. In that post I gave you tips on how to polish your business into an attractive product to be purchased by a rich buyer. In this post I’m going to briefly explain HOW you can sell your business. There are two main ways. Either an asset sale or a share sale. There are pros and cons to each but ultimately your lawyer should be able to advise you on the best method, having considered the nature of your business.
In a share sale, the buyer will purchase everything to do with a company including all assets and liabilities, known and unknown. In an asset sale, the buyer will purchase the assets which make up the business of a company. In the former, pretty much everything stays the same save that the company has a new owner, in the latter, the company will still exist but it will usually be an empty shell harbouring only those assets and liabilities that the buyer did not want to buy.
Below, are some key considerations that will be influential in determining HOW you should sell your business.
In a share sale, due to the fact that the buyer purchases the shareholding in the target company, it inherits all of the assets and liabilities in the target company. This means that the seller gets to walk away from any problems with the company and the buyer as the new owner, takes them on. If a buyer wants to purchase the shares in a company but it is riddled with liabilities such as ongoing litigation, tax investigations etc, it will negotiate a discount in the price of the shares that it is purchasing to reflect the risk of these liabilities or it will negotiate indemnities from the seller. A seller indemnity is basically a promise from the seller to the buyer that if things go wrong with said liability, the seller will pay to the buyer a sum of money as compensation.
In an asset sale, the buyer can effectively cherry pick which assets it will purchase and which liabilities it will assume. For example, the buyer can refuse to assume tax liabilities but it may take on certain ongoing disputes which are inherent in taking on, for example, service contracts.
Usually, in an asset sale, employees do not need to be taken on by the buyer, though commonly the seller will require the buyer to offer new contracts to all or most employees on terms that are substantially similar or identical to their existing contracts (including a recognition of prior service) so that the seller avoids wrongful dismissal claims from the employees.
In a share sale, the target company’s employees remain employed by the company because nothing really changes. It’s just a sale and purchase of shares!
- Reduced Complexity
As you’ve probably cottoned on, share sales are much simpler than asset sales. The only documentation you need is in respect of the shares that are being purchasing. In an asset sale, each asset will effectively require its own contract. For example, there will be separate transfer documentation for equipment, vehicles, intellectual property, licenses, permits and real property.
An asset sale may also trigger the need to obtain third party consents to the transfer of the assets due to change of control provisions in contracts. For example a permit contract may say that the seller “must obtain written consent before it can transfer/assign the right to the permit”. In selling the permit as part of the assets, the seller must ask permission before it can go ahead. For obvious reasons, third party consents can be a pain to obtain; it just takes one unreasonable so and so to hold things up! It is always best to, if you can, give third parties a heads up and assure them of any changes in advance. This will make negotiation a lot easier.
So, the important thing to understand about a share sale vs an asset sale is that one method involves taking EVERYTHING whilst the other allows you to CHERRY PICK what you want. The form of sale that is best for your company really depends on the nature of your business and what it is that you want to sell. There is a heading that I have not covered but which is the most important consideration of all and that is TAX. TAX can determine how much you receive on a sale of your business and it differs in a share sale or an asset sale. This is where experts must be enlisted. I once worked on a deal where, three days before completion the whole structure changed because of TAX. I couldn’t believe it…so many sleepless nights!
As with all my posts, I cannot emphasise enough how important it is to get your lawyers involved but even more so when you are selling your business – after all you want to get the best price right?
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