For many businesses, growth can mean acquiring an existing business. Whether it’s to expand into new markets, gain key assets, or increase customer base, buying a business is often an attractive option.
In England and Wales, business acquisitions are usually structured in one of two ways: an asset purchase or a share purchase. Understanding the differences is vital, as each structure carries distinct legal, tax and practical implications.
1. Asset Purchase
In an asset purchase, the buyer acquires specific assets (and sometimes liabilities) of the target business. This might include equipment, stock, intellectual property, contracts, and goodwill. An asset deal means the buyer can select which assets and liabilities to acquire, offering greater control and flexibility compared to a share purchase.
Advantages for Buyers:
- Flexibility: You can “cherry-pick” the assets and contracts you want.
- Liability control: Undesired liabilities usually remain with the seller.
- Clean start: You can often leave behind historical issues of the business.
- Avoiding significant liabilities: Asset sales allow buyers to avoid taking on significant liabilities, which is a key reason for choosing an asset deal.
Considerations:
- Contract assignments: Some contracts, licences or leases may require third-party consent to transfer.
- Employees: Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), employees will automatically transfer to the buyer with their existing rights.
- Stamp Duty Land Tax (SDLT): May apply if property is acquired.
- VAT: Treatment can vary – in many cases, if the transfer qualifies as a “transfer of a going concern” (TOGC), VAT may not be payable.
- Recurring payments: Arrangements for recurring payments, such as customer subscriptions or automated payments, may require careful transfer or reassignment.
- Double tax charge: Asset sales can result in a double tax charge, with sale proceeds potentially taxed at both the company and shareholder level.
- Other chargeable gains: The sale of certain assets may trigger other chargeable gains for the seller.
When considering asset sales, purchase agreements should clearly specify the company’s assets being transferred and any liabilities the buyer is assuming responsibility for.
2. Share Purchase
In a share purchase, the buyer acquires the shares in the company that owns the business. The company remains the same legal entity – it continues to own the assets, contracts and liabilities, but the ownership of the company changes hands.
Advantages for Buyers:
- Continuity: Contracts, employees, licences and customer relationships remain in place with minimal disruption.
- Simplicity in transfers: No need to assign individual assets.
Considerations:
- Liabilities remain: All past, present and future liabilities of the company remain with it and therefore pass to the buyer.
- Due diligence is essential: Legal, financial and tax investigations are critical to uncover hidden issues.
- Stamp Duty: Payable at 0.5% on the purchase price of the shares.
- Share purchase agreements: These agreements set out the terms of the share sale, including warranties, indemnities, and buyer protections.
- Shareholders agreement: This document defines the rights and obligations of shareholders and is particularly important in share sales.
- Employees remain contracted: In a share purchase, employees remain contracted to the company under their existing terms.
- Tax implications: Share purchases and asset purchases have different tax implications for both buyers and sellers and advice should be sought from a suitably qualified accountant.
3. Key Practical Differences
Both a share purchase and an asset purchase are principal methods of acquiring a business, each with distinct legal and tax implications.
| Asset Purchase | Share Purchase | |
| Control | Buyer chooses what to acquire | Buyer acquires everything (assets & liabilities) |
| Complexity | More contracts to transfer, third-party consents often required | Simpler – company continues as is |
| Risk | Lower – historic liabilities can remain with seller | Higher – buyer takes on all liabilities |
| Tax | SDLT, possible VAT unless TOGC applies | 0.5% Stamp Duty on shares |
| Employees | TUPE may apply | Employees remain with the company automatically |
The most significant difference between an asset purchase and a share purchase is the transfer of control, assets, and liabilities. In an asset purchase, the buyer can select specific assets and liabilities, while in a share purchase, the buyer acquires the entire company, including all assets and liabilities.
4. Which Route is Right for You?
- If you want to minimise risk and only acquire selected parts of a business, an asset purchase may be better.
- If the value lies in continuity of contracts, licences and staff, a share purchase may be more efficient.
- Tax treatment should always be considered, as it may influence the overall cost of the deal.
5. How We Can Help
Whether you are considering an asset purchase or a share purchase, it is essential to take professional advice at an early stage. At Howells Solicitors our expert corporate and commercial legal team can advise companies across a wide range of sectors on business acquisitions. We assist with:
- Structuring the deal to suit your commercial objectives.
- Due diligence to uncover risks before you commit, including advising on buyer protections in both asset and share purchases.
- Negotiating the asset and share purchase agreements, to best protect your position.
- Employment and regulatory issues that may arise.
Conclusion
Acquiring a business can be a transformative step. The choice between an asset purchase and a share purchase depends on your risk appetite, the nature of the business, and your growth strategy. Careful planning – with the right legal guidance – can ensure a smooth and successful transaction.
This article is intended as a general overview and does not constitute legal advice. For tailored guidance, please contact our team at info@howellslegal.com.
