6 February 2023
Asset Purchase or Share Purchase: Which is Best For You?
Please note that, whilst there are significant differences in the tax implications of an asset purchase/sale and a share purchase/sale, this article will not cover these. You should always take tax advice before embarking on a transaction.
Perhaps you are seeking to expand your business vertically, acquiring a company above or below you in the supply chain to streamline each operation and reduce costs. Or maybe your focus is horizontal, your sights set on a competing business in hopes of combining your operations with theirs to forge a more dominant player in the market. Whatever the reason, embarking on the path to a successful acquisition will invariably lead you to the same crossroads. Do you purchase the shares and everything that comes with them, or do you just purchase specific assets?
Each path has its own merits and pitfalls to avoid. Fundamentally, the difference between the two is one of scope. A share purchase can be thought of as a blanket approach whilst an asset purchase is a far more selective process in terms of what assets you as the buyer wish to take on and what you wish to leave behind. Essentially, an asset purchase is an exercise in cherry-picking whilst a share purchase is uprooting the tree entirely. The latter ensures nothing is missed, be it the cherries themselves, or the worms clinging to the roots.
That said, the cherry-picking approach of an asset purchase has pitfalls of its own that must be avoided. Any prospective purchaser must consider all the assets that need to be acquired to ensure that the business can be run in the same way as before and, ideally, even better than before. If a purchaser fails to correctly identify all these such assets, for example, if they fail to take into account third party contracts vital to the performance of existing contracts, they will become the owner of assets that, together, cannot operate nearly as efficiently as the previously existing business, at least not without significant expense in both time and money following the acquisition.
The catch-all nature of the share purchase effectively eschews this danger though introduces a danger of its own. The due diligence carried out in share purchases must be equally stringent and significantly more expansive in scope. You can be certain that there is nothing that you won’t be acquiring but that isn’t to say that there is nothing to be found. Every stone must be overturned to determine the business, and every aspect of it, is the opportunity you think it is. Though this process can be arduous, entrusting it to a specialist firm of solicitors can help to ease this burden. Here at Cook Corporate Solicitors, we are extremely experienced at carrying out thorough due diligence with a keen eye for quickly identifying what the red flags are and various avenues around them.
In an asset purchase, a greater understanding of the business and the market in which it operates will be immensely valuable. A savvy, well-informed buyer can likely extract more value from an asset purchase by taking the time to identify exactly what assets are worth taking on and which assets are not, thus reducing the overall price and simultaneously streamlining the resultant operation. A less savvy buyer will likely miss out on these savings in an asset purchase. A less extensive understanding of the target market will necessitate a greater reliance on outside help to carry out a deep dive into what assets you will want to acquire and those you don’t. The added cost of this can quickly outweigh any potential savings and may even be more expensive than simply opting for a share purchase.
Continuity is also an important consideration. Provided adequate due diligence is performed, in a share purchase, the business ought to be able to continue running up until and immediately after completion in the much same way. A clean transition cannot necessarily be expected in the case of an asset purchase. That said, achieving this is not impossible so long as all the relevant operating assets of the business are taken on. Including a handover period as well, as is customary with share purchases, can help to negate this aspect of asset purchases and ensure a fluid transition.
Also worth considering are any permits, licenses or consents needed to continue operating the business. In a share purchase, these will transfer together with the legal entity you are purchasing. However, in an asset purchase, this is not necessarily the case. It may be that these licenses cannot so easily be transferred and, if they can, there may be an additional cost in doing so. Depending on the ease with which a buyer can take on these licenses, or obtain entirely new ones for the resultant business, it may be felt that a share purchase is the simplest way forward.
Whichever path you ultimately choose, here at Cook Corporate, we are equally adept at either form of transaction and make it our business to ensure your acquisition or sale is completed as quickly as possible and on the best terms for you.