You’ve found a business you want to buy but aren’t sure what the next steps are. Luke Turner, a solicitor in our Corporate team, shares his advice below.
One of the first decisions you’ll need to make is whether to purchase the business through a share purchase or an asset purchase. Below are some key considerations to help you determine which structure might be most suitable for your situation.
Share Purchases
A share purchase involves buying the shares of the target company from its current shareholders. For this reason, it’s not suitable for acquiring businesses that operate as sole traders or partnerships. In a share purchase, the only asset being transferred is the target company’s share capital.
Advantages
- There is no disruption to the company’s contracts or operations, meaning employees, customers, and suppliers experience continuity after completion.
- The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) generally do not apply. This means you typically don’t have to comply with TUPE-related requirements such as consulting employee representatives.
- Since only the shares are being transferred, the transaction is usually less complex. Typically, you’ll only need a share purchase agreement and stock transfer forms.
Disadvantages
- Share purchases are usually riskier because all existing and historical liabilities remain with the company post-completion.
- A thorough due diligence process is essential to identify any hidden liabilities.
- These transactions often take longer due to the need for extensive due diligence and negotiation of warranties, indemnities, and guarantees.
Asset Purchases
An asset purchase involves acquiring specific assets and liabilities of a business, rather than buying shares in the company. The parties will agree on which assets (e.g., property, equipment, inventory, goodwill, intellectual property) and liabilities (e.g., debts, legal obligations) will transfer.
Advantages
- You can ‘cherry-pick’ the assets you want; unwanted assets remain with the seller.
- With the exception of TUPE liabilities and some environmental responsibilities, most liabilities stay with the seller unless otherwise agreed.
- Purchase prices are often lower than in share sales, as only selected assets and liabilities are acquired.
Disadvantages
- Asset purchases can be more complex, as additional documents (e.g., assignment or novation agreements) may be required to transfer individual assets and contracts.
- Some contracts cannot be transferred or may require third-party consent, potentially causing delays or renegotiation.
- TUPE is usually triggered in asset purchases, as they are generally considered a ‘relevant transfer’ under the regulations.
Conclusion
Whether a share or asset purchase is right for you depends on your specific goals and circumstances. It’s important to seek specialist legal advice early in the process to ensure you choose the most appropriate structure.
