Selling a Business From a Buyer’s and Seller’s Perspective

Seller’s Perspective

Share Sale

If a shareholder sells his share in a company, he will no longer be a shareholder in the company. It is usual for a buyer to demand some warranties from the seller. A warranty is a promise or assurance from the seller that indemnifies the buyer and makes him liable after the sale has been completed. Warranties are normally used to ensure that the position which the seller is portraying of the company is accurate.

 Asset Sale

With an asset sale, the buying company will simply buy the desirable asset from the seller. This will not include any potential liabilities of which the buyer will become liable for, unless the seller can negotiate with the buyer to take these over.

Purchase Price

If the sale is to be a share sale, the shareholder who will be the seller, will normally receive the purchase price of the shares directly. Alternatively, when the sale is to be an asset sale, the purchase price will be received by the selling company. The owners of the company in an asset sale then have to work out the best way to extract this money from the company in a tax efficient manner.

Tax Clearance

It is expedient for the seller to have an Accountant check with the HMRC whether “clearance” will be given in relation to the structure of the deal. If this is not done, the seller may be stung for additional and unexpected tax liabilities after the deal has been completed.

 Buyer’s Perspective

The buyer will normally always prefer to buy the assets and goodwill of the company separately rather than buying the whole company. This way he has ultimate control over what he is buying and is not taking on any liabilities or potential liabilities.

If a buyer is to purchase a company through a share sale it is imperative that they conduct a thorough due diligence exercise. A buyer will always take warranties from the seller and may also receive certain indemnities; however, these will not always completely cover the buyer and are only as good as the seller who gives them. Even when the warranties and indemnities are to be used by the buyer, it can be a very costly litigation exercise to recover monies from the seller.

Retention

It is sometimes recommended for the buyer to keep hold of a part of the purchase price as guaranteed security against any potential liabilities which may crop up after completion. This is called a retention.

 Due Diligence

Before a buyer enters into a share sale, a thorough and comprehensive due diligence exercise should be completed. This will include an investigation into the legal, accounting and business practices of the firm. This can sometimes be a costly exercise and is one of the disadvantages to the buyer of a share sale over an asset sale.

 Why would a buyer choose to buy shares rather than assets ?

There are several reasons why a buyer may chose to purchase a company through a share sale rather than conducting an asset sale. These include:

• Certain contracts with suppliers or customers may not be transferable. Certain licences and consents may also not be transferable and could potentially remain with the company. If these contracts are key for the buyer in their decision to buy the company, they may opt for a share sale.

• There may be certain tax advantages for completing the deal as a share sale such as the ability to reduce tax losses in the future by setting them against future profits which may have the effect or minimising tax liabilities.

• If the company occupies leasehold premises or if the landlord is withholding his consent to an assignment of the lease it may be of benefit to complete the transaction as a share sale.

Stamp Duty

When shares are purchased by the buying company, there is a duty to be paid by the seller at a rate of 0.5%. This will need to be paid and a stock transfer form completed before the transfer can be registered in the company’s books.

This guide courtesy of solicitors you may wish to contact if you are buying or selling a business.