Share Sale vs Asset Sale

Asset sale

An asset sale is where the assets of the business are sold, while the seller retains ownership of the business entity and company structure. Assets can include plant, equipment, inventory, property, company name, intellectual property and goodwill.

Share sale

A share sale is where the buyer purchases shares in a business’s legal entity, rather than just the assets. In a share sale the acquirer may purchase anywhere from a minority shareholding to a majority or controlling interest to 100% of an entity. Generally speaking, acquisitions through share sales are more complex and involve greater risk than asset sales and therefore require greater due diligence.

Which is better?

Ultimately, commercial, legal and tax considerations will determine whether a transaction is structured as an asset sale or share sale. Generally, sellers prefer share sale so they can walk away clean, whilst buyers prefer asset sale so it can pick and choose what to take over.

Asset sale pros and cons for buyers

Pros:

•   Lower risk to buyers, as they are only purchasing the company’s assets and not the business legal entity and its contingent liabilities such as product liability, contract disputes, employee lawsuits or issues with product warranties.

•   Can pick and choose assets to take over

Cons:

•   Employee contracts are not transferable in an asset sale and must be re-negotiated with due considerations of liabilities for employee entitlements

•   Contracts with suppliers and customers as well as special licenses and permits may also need to be assigned, renegotiated or re-accredited.

•   Certain assets such as intellectual property, leases, permits and contracts can also be harder to transfer due to issues of assignability, legal ownership, and third party consents, which may result in a slower transition and higher acquisition cost

•   More complex legal process

•   Unable to access carried forward losses of the business being acquired

Asset sale pros and cons for sellers

Pros:

•   Choice of asset to sell and those to retain ownership of

•   GST-exempt if a sold as a ‘going concern’

Cons:

•   May be subject to Stamp Duty, which is generally higher on the sale of assets than on shares.

•   100% of Gains taxable; 50% CGT concession not available.

Share sale pros and cons for buyers

Pros:

•   Full control of the business hence control over transition

•   All contracts with suppliers and customers remain intact

•   Continuity of agreement and terms with employees, suppliers and customers.

•   Can take advantage of carried forward losses

Cons:

•   Increased risk from inheriting the entire business, including any unknown legal, tax or other liabilities the seller may have.

•   Increased due diligence to identify these possible encumbrances, ie, increase of acquisition cost

Share sale pros and cons for sellers

Pros:

•   All of their potential liabilities are re-assigned to the buyer

Cons:

•   Buyer may require more stringent warranties and indemnities from the seller.

Don’t Forget the Small Business CGT Concessions

Separate to the general 50% CGT discount, taxpayers should never forget to consider the small business CGT concessions. This can have a significant influence on the question of share sale or asset sale.

•   The 15-year exemption: Provides a complete exemption from CGT to businesses that have been operatiung for at least 15 years.

•   50% active asset reduction: 50% CGT discount

•   Small business retirement exemption: Allows eligible taxpayers to reduce their capital gain up to the $500,000 lifetime limit – although individuals under 55 years old are required to contribute the amount sheltered from tax under the retirement exemption to a complying superannuation fund

•   Small business rollover relief: Provides an automatic two-year tax deferral during which time, the taxpayer may acquire a replacement active asset to defer the taxing point further.