Buying or Selling a Business: Share Deal or Asset Deal?
If you’re thinking about buying a new business or selling your existing one, understanding the differences between share deals and asset deals is essential. The choice between these two approaches can have significant financial, legal, and operational implications for both parties. Here’s what every business owner needs to know.
Ownership Structure Matters:
- If the business is owned by an individual or a partnership, you must buy or sell the assets.
- If a company owns the business assets, the transaction can either be structured as a sale of assets or as a sale of shares in the company.
The choice between these two structures often comes down to factors like tax implications, liabilities, and control over intangible assets.
Advantages of a Share Sale
From a seller’s perspective, a share sale is generally more advantageous for tax purposes. For example, the owner of “DDDDelicious Doughnuts Ltd.” may face a lower tax bill by selling the shares of the company rather than its equipment, furniture, and inventory.
A share sale also typically includes the company’s goodwill, which is critical if the buyer wants to capitalize on the business’s established reputation. For instance, if the buyer of DDDDelicious Doughnuts relies on the bakery’s name and customer loyalty to drive revenue, acquiring the shares ensures these assets remain intact.
Advantages of an Asset Sale
On the other hand, buyers often prefer asset sales to avoid inheriting liabilities. In a share sale, the buyer assumes all existing and potential liabilities of the company, including those that might not be immediately apparent. With an asset sale, the buyer can cherry-pick the assets they want and leave unwanted obligations behind.
Additionally, asset sales are typically simpler in terms of ownership transfer. Unlike share sales, which may require the consent of multiple shareholders (some of whom might be difficult to locate or negotiate with), asset sales only involve the company that owns the assets.
Key Considerations for Buyers and Sellers
- Due Diligence: Buyers should start with a non-binding letter of interest and thoroughly examine the business’s financial statements and other records. This ensures a clear understanding of the company’s true financial state before committing to the purchase.
- Non-Competition Agreements: A seller should agree not to compete with the buyer after the sale. For example, if Dave sells “DDDDelicious Doughnuts,” he shouldn’t open “Dave’s Decadent Doughnuts” next door. However, such agreements must be reasonable in duration, geographical scope, and the activities they restrict.
- Employees: Employees are a critical component of any business. Buyers need to assess which employees are essential to the business’s success and secure their commitment through employment agreements. It’s also vital to address severance pay, successor employee rights, and other obligations related to seniority and termination.
- Warranties and Representations: Buyers should negotiate robust warranties and representations to protect their interests. Sellers, naturally, will seek to limit their liability. Finding a balanced approach is key to a successful transaction.
Expert Guidance
Navigating the complexities of buying or selling a business requires professional expertise. An experienced lawyer can help ensure that the deal structure aligns with your goals while minimizing risks and maximizing benefits. They can also assist with drafting and reviewing documents, negotiating terms, and addressing potential pitfalls.
At Peak Law Group, we have decades of experience helping both established and new business owners. We’re here to guide you through every step of the process and ensure you’re making informed decisions.
Contact us for a no cost 30-minute consultation to discuss your legal needs. Take the first step toward a successful business transition with Peak Law Group.