Acquiring a Business: Share or Asset Purchase?

Share purchase and asset purchase are two distinct methods of acquiring a business, each with its own set of implications and considerations. Here are the key differences between a share purchase and an asset purchase:

SHARE PURCHASE

1. Ownership Transfer:

• Shares: In a share purchase, the buyer acquires the ownership interest (shares) of the target company. The buyer essentially steps into the shoes of the existing shareholders, becoming the new owner of the entire company.

2. Continuity:

• Business Entity: The target company remains intact as a legal entity. It retains its assets, liabilities, contracts, and relationships. There is a high level of continuity, including the existing name and corporate structure.

3. Liabilities:

• Assumption of Liabilities: The buyer typically assumes all existing liabilities of the company, including potential hidden or contingent liabilities. This includes legal obligations, debts, and any historical liabilities.

4. Contracts and Agreements:

• Preservation of Contracts: Existing contracts, licences, and agreements remain in force. The buyer steps into the shoes of the seller, maintaining all contractual relationships.

5. Tax Implications:

• Tax Attributes: Some tax attributes, such as tax losses or credits, may be transferred to the buyer. The tax treatment of a share purchase can vary depending on the jurisdiction and specific circumstances.

ASSET PURCHASE

1. Ownership Transfer:

• Specific Assets: In an asset purchase, the buyer acquires specific assets and liabilities of the target company rather than shares. This can include tangible assets (e.g., equipment, inventory) and intangible assets (e.g., trademarks, customer lists).

2. Continuity:

• New Entity: The buyer typically establishes a new legal entity to acquire the assets. The target company may continue to exist but often in a diminished form or for the purpose of winding down its affairs.

3. Liabilities:

• Selective Liabilities: The buyer has the option to choose which liabilities to assume. This allows the buyer to avoid certain historical or contingent liabilities, providing a level of risk mitigation.

4. Contracts and Agreements:

- Contractual Negotiation: Contracts and agreements are not automatically transferred. The buyer must negotiate and execute new contracts with suppliers, customers, and other relevant parties.

5. Tax Implications:

- Depreciation and Amortisation: The buyer can allocate the purchase price to specific assets, allowing for depreciation and amortisation benefits. Tax implications may vary based on jurisdiction and specific asset types.

6. Employees:

- Employee Transfers: In some jurisdictions, employees may not automatically transfer to the buyer in an asset purchase. Employment contracts may need to be renegotiated, and there may be implications for employee benefits and entitlements.

Considerations

• Due Diligence: Both share and asset purchases require thorough due diligence, but the focus may differ. In a share purchase, the emphasis is on the overall health of the company, while in an asset purchase, it's on the specific assets and liabilities being acquired.
• Regulatory Approvals: Regulatory requirements and approval processes may vary depending on the type of transaction and the industry.
• Seller's Perspective: Sellers often prefer share purchases because they result in a clean exit, transferring the entire business and its history to the new owner. Buyers may prefer asset purchases for the ability to selectively acquire assets and manage liabilities.

Ultimately, the choice between a share purchase and an asset purchase depends on the specific goals, circumstances, and preferences of both the buyer and the seller. Legal, financial, and tax advisors play crucial roles in guiding parties through the complexities of each transaction type.