Share Purchase vs Asset Purchase: – How do you buy The Business?

Jan 19, 2012 by Karen Anderson

The easy answer to “What are you buying?” is The Business. But this is not always very clear. It becomes more complicated when you need to decide how to buy this vague thing called The Business. One aspect that is always clear in buying The Business  is that you get all the staff and the delights of TUPE regardless of the deal.

The simplest method of buying a business is purchasing the shares of a company. All legal entities that do not have shares are excluded from this form of acquisition so are dealt with later. In essence the purchaser pays the shareholders for their shares and receives the entire company in return.

For shareholders, selling their shares means only pay tax once on the money received. For purchasers, historic liabilities are purchased along with the assets and income, creating additional risk which needs to be managed through due diligence and legal advice regarding the purchase agreement. An additional consideration is whether everything you, as a purchaser, expect to be included in The Business is actually owned by the company whose shares you bought. Sometimes vehicles or the domain url, are owned by private individuals not the company. These would need to be specified and acquired separately from the shares.

What about all the other types of business that do not have shares,eg: sole traders and partnerships? There are also occasions when you just do not want to buy everything in the company or business. And sometimes The Business is contained in various different entities and you do not want to buy a whole batch of new things. In these cases you would buy the elements of  The Business that you want through an Asset Purchase.

For the sellers this type of purchase often entails a double tax bill – the purchaser buys the chosen assets from the entity which owns them usually requiring tax to be paid on the profit, and then the sellers receive their money from that entity with the possibility of a second tax payment being due. For purchasers an Asset Purchase entails inheriting less liabilities and therefore it can require less rigorous due diligence, but hidden liabilities can be attached to various assets too.

In both cases the purchaser ends up owning a business, which may or may not be The Business as initially offered for sale.