Buying A Business – Assets Or Shares?

Assets - When a business is sold, it is more common for assets rather than shares to be sold.  When the assets of a business are sold, the seller sells the:

• Tangible assets – These will be the fixed assets i.e. the plant and machinery.

• Stock in trade.

• Intangible assets – These include the intellectual property and trademarks, key contracts with customers or suppliers, customer information and directory, websites etc.

Shares - When shares in a company are sold, the company remains in existence and continues to trade, often under the same company name.  However, the underlying control and structure of the company has changed.  For example, John is the 100% shareholder in ABC Limited and sells his shares to Sarah.  Sarah is now the 100% shareholder in ABC Limited.  ABC Limited continues to trade as usual.

Risk - For a buyer, a share sale is more risky than buying the assets of the business.  When a buyer purchases the shares in a company, they take the risk of any future liability which the company may incur.  The most significant liability would normally be any tax unpaid or avoided by the company.

When buying the assets of a business, all the assets are purchased free from any securities or charges.  All existing liabilities of the business stay with the seller.  This is why an asset purchase is a much less risky way for a buyer to purchase a business.

Price - Although the same business is effectively being sold, share and asset sales often result in different prices for the business.  It is imperative any prospective buyer takes accountancy advice on the value they are paying for the business.

Employees - With an asset sale, the seller (usually a company) has certain obligations as an employer under the Employment Relations Act 2000.  These include consulting with employees about the possibility of transferring their employment to the buyer.  The seller still needs to terminate employment with the current employees because, once the business assets are sold, the buyer (which will be a new company) will become the new employer.

In an asset sale, the buyer will often agree to employ the existing employees of the business, but has no obligation to do so.

In a share sale, very little changes for the employees as they continue to be employed by the same entity.  However, with a share sale, the buyer will not have the option to put any employees on a 90 day trial period; they will be required to honour the terms of the existing Employment Agreements.

Warranties - Regardless of whether the assets or shares are sold, the seller will be required to provide certain warranties (i.e. statements of fact) about the business. 

When shares are sold, because of the risk to the buyer, the warranties will be extremely comprehensive.  Examples of warranties would include, that:

• all tax has been paid

• no one else has a right to purchase the shares;

• there is no pending litigation against the company; and

• other warranties regarding unforeseen liabilities. 

These warranties require detailed consideration by a seller as to what they can and cannot confidently state in respect of the business. 

Summary

Asset sales are usually preferred, although there can be logistical problems around timeframes, especially with employees.  Share sales might be cleaner from an ongoing business perspective, but provide a risk for both buyer and seller in respect of unforeseen liabilities.

As always, SRB is happy to help with any further enquiries you may have. Please contact us if you are purchasing a business and require legal advice.

The above information is of a general nature only. You should contact our firm for advice relating to your specific circumstances.