Selling your business as a going concern: asset sale or share sale?
For many owner-managed businesses, selling the business is not just a commercial transaction. It is the end point of years of work, relationships and reputation.
One of the first questions that often arises is deceptively simple: should the sale be structured as an asset sale or a share sale? The answer will have an effect on tax, risk, the employees, contracts, leases, licences and the amount of legal negotiation needed before completion.
What does “going concern” mean?
A sale as a going concern means that the business is being sold as a functioning, trading operation rather than as a bundle of disconnected assets. The buyer expects to be able to carry on substantially the same business after completion, using the same core assets, goodwill and trading arrangements.
This is practical as well as legal. If the value of the business depends on customers, employees, premises, supplier arrangements or regulatory permissions, those items need to be dealt with carefully before the sale agreement is signed.
The two main routes
In a share sale, the buyer purchases the entire share capital of the selling company. The company remains the same legal entity. Its assets, contracts, employees, liabilities and trading history stay where they are; what changes is the ownership of the company. This route is of course not appropriate for sole traders or partnerships as there is no limited company.
In an asset sale, the buyer purchases selected assets of the business. These might include goodwill, stock, equipment, intellectual property, customer lists, contracts and the benefit of a lease. The seller here can be a sole trader, partnership and even still a limited company. In that case, the selling company continues to exist unless it is later wound up or otherwise dealt with.
The legal paperwork follows that distinction. A share sale normally involves a share purchase agreement. An asset sale normally involves an asset purchase agreement, plus separate documents to transfer particular assets and obtain third-party consents.
Which is better for me as the seller?
There is no universal answer, but many sellers prefer a share sale where the business is operated through a limited company.
The reason is that a share sale can feel closer to a clean exit. The buyer takes over the company, and with it the business as a whole. Contracts usually remain in place, employees remain employed by the same employer and the company continues trading without needing every asset to be transferred individually.
Tax can also be an important factor. Sellers should take specific tax advice, but in broad terms a share sale may be more attractive for individual shareholders than an asset sale where the sale proceeds are received by the company first and then need to be extracted personally.
That does not mean a share sale is always best. If the company has retained assets that are not part of the deal, or if the seller wants to keep a separate trade, property or investment activity, an asset sale may be more flexible. The right structure depends on what is being sold, what is being kept, the tax position and the buyer’s appetite for risk.
Why does the buyer usually want the opposite?
Because buyers generally want control over what they acquire and what they leave behind.
In an asset sale, the buyer can try to “cherry pick” the valuable parts of the business and avoid historic liabilities, old disputes, tax risks, unwanted contracts and other problems that may be sitting inside the company. That is why buyers often favour asset purchases, particularly where they are not completely comfortable with the company’s past.
In a share sale, the buyer steps into ownership of the whole company. If something went wrong before completion, the company may still be responsible for it afterwards. The buyer will therefore carry out more due diligence and will often require detailed warranties, indemnities and disclosure from the seller.
This is the central tension in many negotiations. The seller wants finality. The buyer wants protection.
What happens to my employees?
On a share sale, the employees normally stay employed by the same company. Their employer has not changed, even though the shareholders have. In practical terms, payroll, contracts of employment and continuity of employment usually continue without a transfer to a new employer.
On an asset sale, the Transfer of Undertakings (Protection of Employment) Regulations 2006, usually known as TUPE, may apply. Where TUPE applies, employees assigned to the business transfer automatically to the buyer on their existing terms, and their continuity of employment is preserved.
TUPE is often one of the most sensitive parts of an asset sale. There may be obligations to inform and consult employees, and dismissals connected with the transfer can create risk if not handled properly. Sellers should take employment advice early, particularly where redundancies, restructures or changes to terms are being considered.
What about contracts, the lease and licences?
In a share sale, contracts usually stay with the company because the company remains the contracting party. However, key contracts should still be checked for change of control clauses. These can give a customer, supplier, funder or other party rights if ownership of the company changes.
Leases also normally remain in place on a share sale, subject again to the wording of the lease and any change of control restrictions. Some leases require landlord consent where control of the tenant company changes.
Licences can be more awkward. Some licences are personal to the company and continue on a share sale, while others may be affected by ownership changes, regulatory approval or fitness requirements. This needs to be reviewed licence by licence.
In an asset sale, the position is usually more involved. Contracts may need to be assigned or novated. A lease may need to be assigned to the buyer, requiring landlord consent and sometimes guarantees. Licences may need to be transferred, reissued or applied for again. Any one of these can affect timing and completion.
The practical point is simple: identify the contracts, lease arrangements and licences that the buyer must have in order to run the business, and check very early whether third-party consent is needed.
What are warranties and indemnities?
Warranties are contractual statements about the business. They might cover the accuracy of the accounts, ownership of assets, tax, employees, litigation, property, data protection, intellectual property, contracts and compliance with law.
If a warranty proves to be untrue and the buyer suffers loss, the buyer may bring a claim for breach of warranty. The seller’s protection is usually found in careful disclosure, financial caps, time limits, minimum claim thresholds and other contractual limitations.
Indemnities are different. An indemnity is a promise to reimburse the buyer for a specific liability or category of liability. They are often used where a known risk has been identified, such as a tax issue, an employee claim, a dispute with a supplier or a problem with property compliance.
Indemnities can be more seller-sensitive than warranties because they are usually easier for the buyer to claim under. Sellers should resist broad or unnecessary indemnities and, where they are justified, make sure they are tightly drafted and commercially proportionate.
How exposed am I after completion?
Your exposure depends on the structure of the deal and the protections agreed in the sale contract.
On a share sale, the buyer is likely to ask for a wider package of warranties because it is acquiring the whole company with its history. Sellers should expect detailed due diligence and should take the disclosure process seriously. A properly prepared disclosure letter can be as important as the warranties themselves.
On an asset sale, the seller may retain more liabilities in the selling company, but the warranty package may be narrower because the buyer is acquiring selected assets rather than the whole corporate entity. That said, buyers will still want protection for the assets they acquire and for any liabilities that transfer by law, including employment liabilities where TUPE applies.
Common seller protections include a maximum liability cap, shorter claim periods, de minimis thresholds, a requirement for the buyer to notify claims promptly, exclusions for matters fairly disclosed and limitations where the buyer has already recovered under insurance or from a third party.
So which route should I choose?
Start with the commercial reality. What is the buyer really paying for? Is it a company with valuable contracts and licences that should remain intact, or a set of assets that can be transferred into another business? Are there historic liabilities that make a buyer nervous? Are there tax consequences that materially change the net proceeds for the seller?
For many sellers of profitable owner-managed companies, a share sale is the preferred starting point. For many buyers, an asset sale is the safer starting point. The eventual answer is usually negotiated somewhere between tax efficiency, legal risk, transaction complexity and what the buyer needs in order to carry on the business after completion.
The best time to consider the structure is before heads of terms are agreed. Once the parties have signed up to a route, price and timetable, it can be difficult to change direction without losing momentum. Early advice from your solicitor and accountant can help you understand the likely tax outcome, spot consent issues, prepare due diligence materials and negotiate from a stronger position.
How Fraser Dawbarns can help
Our corporate lawyers will be happy to work with your accountants as you seek the best way to sell your business as a going concern. Where needed, our employment law solicitors will be able to advise on any TUPE aspects of the transaction.
We recognise that you are looking for a practical commercial approach to selling your business but also that you have invested a great deal of time and energy into building up both the business and its reputation. Our aim will be to help you find the best way to maximise your return on those investments.
For individual advice please contact Jenny Ball or Jenny Horsley or complete our enquiry form and we’ll be in touch.
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This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances. Fraser Dawbarns LLP is always happy to provide such advice.