Share Sale vs Asset Purchase: What's Right For Your M&A Transaction?

In mergers and acquisitions (M&A), two primary transaction structures dominate: share sales and asset purchases. While both methods aim to transfer ownership, they offer distinct legal, financial, and operational implications for buyers and sellers alike. Understanding the intricacies of these transaction types is crucial for making informed decisions that align with strategic goals.

Share Sale: Acquiring the Entire Entity

A share sale, also known as a stock sale, involves the buyer purchasing the shares of the target company directly from its shareholders. This approach results in the acquisition of the entire entity, including all its assets, liabilities, contracts, and ongoing obligations.

Advantages of Share Sales

1. Simplicity in Transfer: A share sale often simplifies the transfer process since the ownership of the company itself changes hands without necessitating the individual transfer of each asset.

2. Continuity: The target company continues to operate as it did prior to the sale, preserving existing contracts, customer relationships, and supplier agreements, which can be advantageous for maintaining business continuity.

3. Tax Efficiency: From the seller's perspective, a share sale can be more tax-efficient. Capital gains on shares may be taxed at lower rates compared to ordinary income taxes on asset sales.
   

Disadvantages of Share Sales

1. Inherited Liabilities: The buyer assumes all existing liabilities of the company, including potential unknown or contingent liabilities, which can introduce significant risk.

2. Complex Due Diligence: Comprehensive due diligence is required to identify and assess all existing and potential liabilities, contracts, and obligations, making the process more complex and time-consuming.

3. Minority Interests: If the target company has minority shareholders, additional complexities and negotiations may arise to ensure their interests are adequately addressed.

Asset Purchase: Acquiring Specific Assets

In an asset purchase, the buyer selectively acquires specific assets and liabilities of the target company, rather than its shares. This allows for a tailored approach, where the buyer can pick and choose which assets to acquire and which liabilities to assume.

Advantages of Asset Purchases

1. Risk Mitigation: By acquiring only selected assets and specified liabilities, the buyer can avoid assuming unwanted or unknown liabilities, reducing overall risk exposure.

2. Tax Benefits: Buyers may benefit from the step-up in the tax basis of acquired assets, allowing for higher depreciation deductions and potential tax savings.

3. Flexibility: The ability to cherry-pick assets provides greater flexibility to align the acquisition with the buyer's strategic objectives, enabling a more focused integration process.

Disadvantages of Asset Purchases

1. Complexity in Transfer: Transferring individual assets and liabilities can be administratively burdensome, requiring separate agreements for each asset and potentially necessitating third-party consents for contracts and leases.

2. Tax Implications for Sellers: Sellers may face higher tax liabilities as asset sales can trigger ordinary income tax rates on certain gains, making the transaction less appealing from a tax perspective.

3. Operational Disruptions: The process of transferring specific assets may cause disruptions in operations, particularly if key contracts or relationships are impacted by the change in ownership.

Q&A: Commonly Used Financial Industry Terms

Q: What is due diligence?

A: Due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer, particularly to establish its assets and liabilities and evaluate its commercial potential.

Q: What are contingent liabilities?

A: Contingent liabilities are potential obligations that may become actual liabilities if certain events occur. They are uncertain and depend on the outcome of future events.

Q: What is a step-up in tax basis?

A: A step-up in tax basis is an adjustment of the value of an asset for tax purposes upon inheritance or sale, which can reduce taxable gains when the asset is eventually sold.

Q: What are third-party consents?

A: Third-party consents are approvals required from external parties (such as landlords, suppliers, or customers) to transfer contracts or agreements during an asset purchase.

Q: What is capital gains tax?

A: Capital gains tax is a tax on the profit from the sale of an asset. For share sales, it typically applies to the difference between the sale price and the original purchase price of the shares.

Enquiries

For further information, please contact info@langdoncap.com

About the author

Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of debt, equity, M&A and derivatives transactions with global corporates, private equity funds and financial sponsor groups.

About Langdon Capital

Langdon Capital assists SMEs and mid-market companies with capital raising, M&A and disposals up to £250m in transaction size; and innovative, high-growth companies with >£1m in annual revenue and >30% in annual revenue growth raise debt or equity, at Series A and later funding rounds, from a network of alternative investors spanning private equity firms, venture capital funds, corporate VC arms, family offices, venture debt funds, private credit funds, real estate funds and hedge funds.

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