Now that you have decided to sell or purchase a business, what exactly are you going to sell or buy?
Principally the decision will be whether the business will be sold/purchased by way of an asset sale or a share sale. This article provides a general overview of these two types of sales. Obviously the legal status of the business will determine what options are available.
As the name suggests, this is a sale of the shares in a limited company, with the buyer purchasing shares and gaining control of that company as a whole. This means that as well as the benefit of taking on the business and assets, the buyer will also be assuming responsibility for the liabilities and obligations of the company.
From a seller’s perspective it is arguably more beneficial to proceed down this route as it relieves them from obligations and liabilities. Conversely, this type of sale may not be so attractive to a buyer. It may be that a decision to proceed will depend on the bargaining power of the parties involved.
Given the potential obligations and liabilities being taken on, it is usual (and advisable) for a detailed, careful and comprehensive due diligence exercise to be carried out. This will involve obtaining information about the company’s accounts, contracts, loans and other funding facilities, leasing agreements, leases of property, etc. An unprepared buyer could find themselves taking on something they may not know about.
This is where a buyer only acquires particular assets of a business – in essence the buyer is able to “cherry pick” those assets that it considers are of value and can thus be more attractive for them. Assets commonly acquired in this way include goodwill, customer lists, property, names, etc. Only the assets (and liabilities) identified are passed to the buyer, with all other assets and liabilities remaining with the seller.
A thorough due diligence exercise should still be carried out in relation to the assets with particular focus on what needs to be done in order to transfer the asset to the buyer. There can be many complex issues involved – for example, if a leasehold property is being transferred it will be necessary to obtain the landlord’s formal consent to the assignment/transfer of the lease. In other cases the terms of a key contract may not permit it to be transferred to someone else, or an important domain name may be registered in a different name to that of the seller. All relevant factors will need to be taken into account and investigated to ensure the assets can pass to the buyer without difficulty.
Other factors to consider
As mentioned above, the sale and buying process will depend on the type of business and you will need to consider exactly what it is that you want to sell or buy. It may not be quite so simple to make a decision between a sale of shares in a limited company or a sale of assets. There will be other matters to consider too, for example (and by no means exhaustive) are there any conditions/restrictions/rights of pre-emption/other factors attached to the shares that may be sold; which assets are to be sold and which will be retained; is there any property involved and is it freehold or leasehold; and are employees to be transferred?
It may be that the seller has to think about whether a full or partial sale is desired. A seller may want a clean break or have continued involvement in, or keep small stake in, the business. Indeed, a buyer may want continuity and specialist knowledge of operations for a period of time after completion which may leave a seller with little choice!
Additionally, taxation and financial advice is likely to impact on how the sale and purchase is structured and this should be sought at the outset. Changing the structure during the course of the sale will not only add time, costs and cause unnecessary delays, but it may also deter the other party from proceeding.
Whether you are proceeding with a share sale/purchase or an asset sale/purchase, it is important to prepare for the proposed transaction. Time and diligence spent at the beginning will save time at the end, helps smooth the process of the transaction, and creates the right impression.