Buying a Business: Assets vs Shares — What’s the Difference?

A business acquisition may be structured as an asset sale, where the buyer purchases selected assets used to operate the business, or as a share sale, where the buyer purchases shares in the company that owns and operates the business.

Although both structures can result in the buyer taking control of an existing business, the legal effect can be quite different.

Understanding the distinction is important before signing a contract, as the structure can affect liabilities, contracts, employees, licences, tax, due diligence and the documentation required to complete the transaction.

Read related article: Buying or Selling a Business in Queensland: Key Legal Considerations.

What is an asset sale?

In an asset sale, the buyer purchases some or all of the assets that make up the business rather than purchasing the company itself.

Depending on the business, those assets may include:

• plant and equipment;
• stock and inventory;
• business names;
• intellectual property;
• websites and domain names;
• customer or supplier contracts;
• licences and permits, where transferable;
• goodwill;
• telephone numbers and social media accounts; and
• rights relating to the business premises or lease.

The buyer will usually operate the acquired business through their own company, trust or other business structure after settlement.

This means it is important for the sale contract to clearly identify which assets are included and which are excluded.

What is a share sale?

A share sale is different.

Instead of purchasing the individual assets of the business, the buyer purchases some or all of the shares in the company that operates the business.

Shares represent ownership in a company, and ASIC requires proprietary companies to notify it of changes to member and share details. A transfer of shares must generally be notified to ASIC within 28 days.

The company itself continues to exist after the transaction. It generally continues to own its assets and remains the party to its existing contracts and obligations.

This continuity can make a share acquisition attractive in some circumstances, but it also means that careful due diligence is particularly important.

The key difference: what does the buyer acquire?

The simplest way to distinguish the two structures is:

Asset sale: the buyer acquires specified assets of the business.

Share sale: the buyer acquires ownership of the company that owns the business.

That distinction can have significant consequences.

With an asset purchase, the parties can generally identify the particular assets being transferred and deal specifically with the liabilities and obligations associated with the transaction.

With a share purchase, the underlying company remains the same legal entity. The buyer therefore needs to understand the company's existing affairs, including its assets, liabilities, contracts and other obligations.

What happens to existing liabilities?

Liabilities are one of the most important issues to investigate when determining how a business purchase should be structured.

In an asset sale, the contract should clearly address which liabilities, if any, the buyer will assume and which remain with the seller.

However, purchasing assets rather than shares should not simply be assumed to eliminate every possible exposure. Employee arrangements, contractual obligations, securities, tax matters and the particular terms of the transaction may all require separate consideration.

In a share sale, the company continues to exist with its historical affairs. This makes it particularly important for a buyer to investigate matters such as:

• existing debts;
• taxation liabilities;
• employee entitlements;
• litigation or potential claims;
• warranties given to customers;
• regulatory compliance;
• loans and securities;
• contractual obligations; and
• any other actual or contingent liabilities.

The scope of due diligence should be tailored to the particular company and transaction.

What happens to contracts?

Existing contracts can also be affected differently.

In an asset sale, contracts used by the business may need to be assigned or replaced. Some contracts require the consent of the other contracting party before an assignment or change can occur.

The buyer should therefore identify important contracts early in the transaction and determine what needs to happen for those arrangements to continue after settlement.

In a share sale, the company remains the contracting party because the company itself has not changed.

However, that does not necessarily mean every contract continues unaffected. Some agreements contain change-of-control provisions that may require consent or trigger particular rights if ownership or control of the company changes.

These provisions should form part of the buyer's due diligence.

What about the business premises?

If the business operates from leased premises, the lease can be critical to the transaction.

For an asset purchase, the existing lease may need to be assigned to the buyer or a new lease may need to be negotiated with the landlord.

Landlord consent and other requirements under the lease should be investigated well before settlement.

In a share sale, the tenant company generally remains the same entity. Nevertheless, the lease should still be reviewed for any provisions dealing with a change in ownership or control.

Read related article: Commercial Leases in Queensland: What Business Owners Need to Know.

Employees

Employees also require careful consideration in a business acquisition.

The parties need to establish what will happen to employees at settlement and how matters such as accrued entitlements and ongoing employment will be dealt with.

The consequences can differ depending on whether the transaction is an asset sale or share sale, the employees involved and the terms of the transaction.

Employee arrangements should therefore be considered before the sale contract is finalised rather than left until settlement.

Licences, permits and approvals

Some businesses rely heavily on government licences, industry accreditations, permits or other regulatory approvals.

In an asset sale, a buyer should not assume that these automatically transfer with the other business assets.

Some licences may require a new application, approval or consent.

In a share sale, a licence may remain held by the same company, but a change in control can still have regulatory consequences depending on the particular licence.

Identifying these requirements early can prevent a situation where a buyer completes the acquisition but cannot immediately operate the business as intended.

Due diligence in an asset purchase

Due diligence remains important when purchasing business assets.

Depending on the transaction, a buyer may need to investigate:

• ownership of the assets;
• security interests over assets;
• financial performance;
• stock;
• equipment;
• intellectual property;
• important contracts;
• employees;
• leases;
• licences and permits; and
• any liabilities the buyer has agreed to assume.

The sale contract should also clearly document exactly what is being purchased.

Due diligence in a share purchase

A share acquisition usually requires detailed investigation of the company itself because the buyer is acquiring an ownership interest in the existing entity.

Due diligence may extend to:

• company records and share ownership;
• financial statements;
• tax records;
• assets and liabilities;
• financing arrangements and securities;
• material contracts;
• employees;
• leases;
• intellectual property;
• licences;
• insurance;
• disputes or litigation; and
• regulatory compliance.

The findings from due diligence may influence the purchase price, conditions of the transaction and the warranties and indemnities sought from the seller.

Warranties and indemnities

The sale contract is important in allocating risk between the buyer and seller.

Depending on the transaction, a buyer may seek warranties about matters such as ownership of assets, financial information, contracts, taxation, employees, litigation and compliance.

Indemnities may also be negotiated for particular identified risks.

These provisions should be tailored to the transaction rather than treated as standard wording.

GST and tax considerations

The tax consequences can differ substantially between an asset sale and a share sale.

For example, some business asset transactions may potentially qualify as the GST-free supply of a going concern if the legislative requirements are satisfied. The ATO states that these include the purchaser being registered or required to be registered for GST, the parties agreeing in writing that the sale is of a going concern, the seller supplying everything necessary for the continued operation of the business and continuing the business until the day of supply.

Capital gains tax, GST and other tax consequences may also differ according to the transaction structure and the circumstances of the parties.

Buyers and sellers should obtain appropriate accounting and tax advice before settling on the structure of a transaction.

Which structure is right for your transaction?

There is no single structure that is appropriate for every business acquisition.

The decision between an asset purchase and a share purchase may depend on matters including:

• the type of business;
• the assets being acquired;
• the company's existing liabilities;
• important contracts;
• employees;
• licences;
• taxation consequences;
• financing arrangements; and
• the commercial objectives of the buyer and seller.

Ideally, the proposed structure should be considered before the parties commit to the transaction, as changing the structure later can affect negotiations, due diligence and the sale documentation.

This article provides general information only and does not constitute legal, taxation or financial advice. Advice should be obtained for your individual circumstances.