Legal issues when buying or selling a business

Share or asset sale?

When parties discuss the sale of a business (where that business has a company structure), they must consider whether the business will be sold by selling the shares of the company or the assets of the company. That initial decision will impact the matters to be addressed by each party and the type of sale contract to be used. It will also have a significant bearing on the due diligence process.

An asset sale involves the sale of business assets owned by a company. Common sale assets include plant and equipment, goodwill, stock, real-estate, contracts (including service and supply), licences, permits, business/trading names, records and intellectual property (e.g. domain names, patents and trademarks). The contract is between the company/seller and the buyer of the assets. The seller retains ownership of the company structure and the assets of the company not included in the business sale.

In a share sale, the buyer purchases the shares in the company as opposed to its business assets. The transaction is between the company’s shareholders and the buyer of the shares with the company retaining its assets and liabilities. It is the ownership of the company that changes hands not the business assets.

Although share sales are often simpler than asset sales (particularly where existing contracts, licences or permits are a key part of the sale) and the transition of the business frequently occurs with less interruption, the risk is often higher in buying shares, as the purchaser will become responsible for the liabilities of the business (including tax liabilities). As a result of this, it is more common for business sales/purchases to proceed as asset sales as opposed to share sales.