The common ways of selling a business are either to sell the shares, if the business is incorporated as a company (see ‘A Guide to the Sale of Company Shares’), or to sell the assets and goodwill if the owner(s) operates as a sole trader or partnership. The latter case is commonly referred to as a ‘business and asset sale’. Occasionally, a company will sell its business and assets (as opposed to its owner selling it shares) although this is not often tax efficient for the sellers.
There are other ways an owner can achieve ‘an exit’ or otherwise realize value in his business. The sale of a dental business, for example, requires a very particular approach due to certain regulations that apply.
The focus of this note is to consider the key aspects of a business and assets sale and to contrast that with the sale of company shares.
The sale of business and assets is a bit like selling anything else in a business. But instead of selling goods or services, the sale will be either of the whole of the business and assets, or in some cases a particular part (or department).
The Pros and Cons
A key feature is that a buyer can ‘cherry pick’ exactly what assets it wants to buy, what contracts it wants to take over, and what liabilities it is prepared to take responsibility for. This makes it less of a risk than buying shares in a company where the buyer is commonly said to inherit ‘warts and all’.
What a buyer cannot pick and choose are the employees who transfer under law to the new purchaser. The rules that apply are the Transfer of Undertakings (Protection of Employment) Regulations 2006 which might be known to you as ‘TUPE’.
Because the buyer specifies exactly what he is buying, the due diligence exercise on the target business is less detailed although there can still be issues that a buyer and seller need to deal with.
In some cases, licenses and other contracts may need to be formally transferred, or consents may be required to transfer ownership in the business.
The Documents and the Process
The documentation is usually less extensive for a business and asset sale than it is for a share sale transaction. The main document is a sale agreement which will contain all of the key terms of the deal.
Other documents may include ones relating to a transfer of business premises (whether that is of a lease or freehold interest), consultancy or new employment contracts for key personnel, and documents releasing existing security interests affecting the assets being acquired.
Many sales will complete immediately following the exchange of contracts. In some cases completion can be delayed pending the fulfillment of certain conditions. This is typical, for example, for the sale of a pharmacy business where applications to change and register a transfer of ownership must be made to the local Primary Care Trust (‘PCT’) and General Pharmaceutical Council (‘GPhC’).
Once the sale has gone through, there will be some ‘house keeping’ to be done. It will often be appropriate, for example, to inform customers and suppliers of the change in ownership and the ‘assignment’ of relevant contracts. Under the sale contract, costs and receipts of the business are usually apportioned between the buyer and seller and the agreement will include a process for the parties to follow to agree on who owes who what.
Where a business is operated either as a partnership or by a sole trader, or where a company disposes of only a part of its business (such as a division), the sale will by definition be a business and asset sale. However where a sale is of a business run through a company, a sale of the business will more often than not be achieved by a sale of the shares. Business sales enable purchasers to pick and choose exactly what assets and liabilities to take on which can be attractive compared to buying shares in a company where the purchaser will inherit all liabilities in the target business. However, given a choice, a seller will for tax reasons usually insist on a sale of shares.