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Expanding your Business: The difference between an Asset Purchase and a Share Purchase

Are you looking to expand your business? Maybe you wish to invest in acquiring another business to aid your expansion?

There are two ways in which a buyer can acquire a business. Whilst both arrangements aid a similar commercial purpose, there are fundamental differences in respect of the legal effect and tax treatment. There are advantages and disadvantages to both asset and share purchases which all depend on the type of business you run and your economic goals. It is therefore imperative that you seek legal advice when considering an acquisition (or sale) of a business.

What is a share purchase?

A share purchase requires the purchase of 100% of the shares of the Company. The Company is sold inclusive of all of its assets, obligations and liabilities, for example tax liabilities and debts. This arrangement involves purchasing all of the shares of the Company from the shareholders.

Therefore, the only assets which change hands during this transaction are the shares. Once a share sale completes, the buyer assumes responsibility for the Company in its entirety. As a result of this, greater due diligence would always transpire when undertaking a share purchase.

The focal document involved in a share purchase is the Share Purchase Agreement (also referred to as the “SPA”). This document sets out all of the main significant terms upon which the buyer shall purchase the shares. Share purchase agreements are very lengthy and complex in nature and owing to the fact the agreement is a legal document, it must also comply with legislation.

What is an asset purchase?

Under an asset purchase, the buyer selects the assets, rights and sometimes even assumes responsibility for certain liabilities it wishes to acquire from the seller (explicitly excluding those which it does not wish to acquire) and purchases them. The collection of the assets is referred to as the “Target Business”.

The types of assets which a buyer is likely to be interested in can include intangible assets such as the business contracts or any intellectual property rights, but also tangible assets such as the business premises, stock and machinery.

In an asset transaction both parties will enter into negotiations regarding specifically which assets the buyer will acquire from the Company upon completion. The remaining assets will remain with the seller.

The key document used in an asset purchase is the Asset Purchase Agreement (also referred to as the “APA”).

Stereotypically, the buyer will prefer an asset purchase and the seller will prefer a share purchase. However, this preference is based on many factors and the final decision made by the Company should be thoroughly calculated, taking into account the risks, benefits and tax efficiency.

It is important to involve solicitors and tax advisors from the outset to discuss your options in order to ensure the correct deal structure is adopted.

At Pepperells Solicitors, we provide a range of Corporate and Commercial Property legal assistance and advice services for businesses. For more information or an initial discussion, please get in touch via our website or alternatively call us on 01482 326511.

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