In this guide we will provide an overview of what to expect of the process when buying or selling a private company or business. In four separate editions we will cover issues of interest to both buyers and sellers, including the structuring of a deal, the process and the transaction documentation involved.
PART I Structuring the transaction: asset vs share deal
PART II Due diligence investigation
PART III Warranties, indemnities and disclosure
PART IV Transaction documentation
PART I – STRUCTURING THE TRANSACTION: ASSET VS SHARE DEAL
A company’s business can be acquired in one of two ways:
- By buying the shares in the company that owns the business (share deal). Here, the sellers are the shareholders of the company and they will sell their shares in the company to the buyer.
- By buying the assets of the company which comprise the business (asset deal). Here, the company is the seller and it will sell some or all of its assets to the buyer.
The majority of acquisitions are structured as a share deal, but a number of factors may impact on which structure is used, the most common are looked at briefly below.
Tax
The structure of a transaction is often driven by the tax implications for the buyer and sellers. Their interests may well be at odds when it comes to achieving the most beneficial tax outcome.
As this is a complex area, dependent on the specific circumstances of the parties (including the availability of exemptions, reliefs and allowances), we will not cover the various tax consequences of a deal. As a general rule of thumb, however, where sellers are individuals they are likely to favor a share sale in order to avoid a potential double tax charge – an initial tax charge on the company at the time of the sale of assets to the buyer and a further tax charge on the company’s shareholders when they withdraw the sale proceeds from the company.
As tax is likely to be a key determining factor to the structure of a deal, both buyers and sellers should obtain specialist tax advice at the outset. Please contact us if you require additional information.
Assets and liabilities
On a share deal the buyer acquires the entire company with all its assets, liabilities and obligations. Generally, this route offers sellers a cleaner break as after the sale takes place they will have no direct responsibility for the company – any continuing liability will be that owed to the buyer under the terms of the warranties and indemnities agreed in the sale and purchase agreement (to be discussed in Part IV – Transaction documentation).
On an asset deal only the assets and liabilities which the buyer specifically agrees to purchase are acquired and everything else stays with the company. If the buyer suspects there are unknown liabilities in the company or is troubled by any particular aspect of the business, it may prefer to structure the deal as an asset deal – allowing it to “cherry-pick” from the company’s assets and liabilities and take on only those risks which it understands and finds acceptable. One asset/liability which the buyer cannot leave behind so easily however is the target’s staff.
Practicalities – consents and continuity
Generally speaking, there are more practical and commercial issues to contend with on a business sale than on a share sale.
On a share deal only the ownership of the shares in the company is transferred. Whilst the shareholders of the company will change, its assets (including its business contracts, agreements and licenses) remain with the company. From the outside, very little will appear to have changed and customers and suppliers will usually be happy to continue dealing with the company as before. Certain contracts (for example, financing contracts and other long-term agreements) may however require the other party’s consent when a change of ownership of the company is planned. It is important to identify any such contracts early in the process.
On an asset deal the assets and contracts of the business being sold will all need to move across to the buyer and the consent of customers, suppliers, landlords, licensors and others is more likely to be required. Contracts, agreements, land and property and certain intellectual property rights will all need to be formally transferred. There is likely to be more disruption to the business than on a share sale and the buyer may need to build confidence with the customers and suppliers of the business to maintain existing trading relationships.
Employees and pensions
On an asset deal it is likely that the employees will automatically transfer to the buyer on their current terms of employment and the buyer becomes their employer. Buyers and sellers should be aware that they will have specific obligations to inform employees about their plans and may need to consult with employees prior to completion of the sale. Certain pensions rights may also transfer to the buyer based on local regulations.
On a share deal there is no change of employer and the employees remain employed by the target company.
Buyers and sellers should ensure they are aware of the pensions implications when buying or selling a target company or business. This is a complex area and the potential liabilities and obligations can be significant. It is recommended to involve (local) counsel in this respect.
Pre- or post-completion restructuring
Sometimes it will be necessary to restructure the business or company before it is sold to allow it to be acquired in the most appropriate way. For example, where:
- the seller is only selling particular assets or part of the business; or
- the buyer is not prepared to take on certain liabilities or aspects of the business, a business sale would seem appropriate. There may however be other reasons (often tax) which make it more desirable to arrange the deal as a share deal. Where this is the case, the seller may transfer (or “carve-out”) the business to a separate new company under its control, allowing the buyer to acquire that new company (minus the aspects not for sale or not wanted) by means of a share deal.
- Similarly, a buyer may wish to carry out a post-acquisition reorganization either for tax reasons or to integrate the target company or business into its group.
In particular, the tax consequences of any restructuring should always be considered.
