Whenever someone is discussing buying or selling a business, the term ‘business sale’ will often be used, but in truth, it is often used wrongly. Commercial law defines a business sale as a specific legal process, and often the transaction taking place is not a business sale but a share sale.
A business sale and a share sale are two distinct types of transaction, and each has several legal differences in commercial law, even though once the sale takes place, it has the same outcome. To clarify what this means in practical terms, here are some of the differences between business sales and share sales
The legal owner of a business is the company and whilst that business ownership does not change, with the buying and selling of shares the ownership of the company can change. In certain states, there are advantages to share sales such as no transfer duties to be paid. There are also administrative benefits such as there being no need for new bank accounts to be opened and contracts with employees and suppliers remain in place.
For sellers, their main advantage of a share sale is that they may be entitled to pay less CGT which in turn might also indirectly benefit the buyer too. it could enable them to negotiate a lower price for the shares given that the seller has a CGT discount.
As a share sale can mean that the control of the company changes there are also implications concerning the company’s debts and liabilities. This means that any buyer must conduct extensive due diligence. This could lead to them seeking variation in the price to offset debts and liabilities or require warranties from the sellers before proceeding.
A company that is in business has several assets. These can include:
- Land Ownership Or Leases
- Buildings And Property
- Stock, Materials, Goods
- Plant, Tools, Equipment
- Intellectual Property e.g. Trademarks
- Goodwill e.g. Client Lists
With business sales, it is these business assets owned by the company which are for sale, not the shares in the company. When a business sale is concluded, the ownership of the assets of that business is transferred to the buyer and at that point, the buyer would have legal title to them.
In practical terms, the new owner would take over leases for land and buildings, become the new employer of the employees within the business and would become liable for paying utility bills and supplier contracts.
Where a business sale differs in relation to liabilities is that, unlike a share sale where the buyer takes on the company’s debts and liabilities, with a business sale the buyer does not. Those liabilities remain with the company selling the business assets. For buyers, this means they start with a clean sheet on day one versus being responsible for debts and liabilities from the beginning.
Complications might arise with specific licences which the business requires as often these are granted to the company which owns it, not the business. This is most likely the case with licences granted by the government and would need to be resolved before the sale especially if they were critical to the operation of the business.
Which Is Best? Business Sale Or Share Sale?
There is no definitive answer to that question as each of them is used in different circumstances depending on whether it is the assets of the business which are being bought or sold or shares in the company. Our advice is, whether you are buying or selling, to contact your commercial lawyer before making any decisions and seek their advice on whether a business or share sale is most appropriate for you.