When you buy a business, one of the first structural questions is what exactly you are buying.
In the UK, many acquisitions are structured as either a share purchase or an asset purchase.
With a share purchase, you buy the shares in the company that owns and operates the business.
With an asset purchase, you buy selected parts of the business itself.
The commercial outcome may look similar, but the legal, tax and practical implications can be very different.
What is a share purchase?
In a share purchase, the buyer acquires shares in the existing company from its shareholders.
The company itself continues to exist.
Its employees, assets, customer relationships, contracts and liabilities generally remain within the same legal entity, subject to the terms of the transaction and any required third-party consents or change-of-control provisions.
Imagine you want to acquire ABC Engineering Ltd.
Rather than buying its machinery, customer contracts and other assets individually, you acquire the shares in ABC Engineering Ltd from its current shareholders.
After completion, you own the company.
What is an asset purchase?
In an asset purchase, the buyer acquires agreed assets and, where applicable, liabilities from the business.
These might include:
- customer contracts
- equipment and machinery
- stock
- intellectual property
- goodwill
- property
- certain employees
- particular business operations
The buyer and seller agree exactly what is included and what remains behind.
This can provide greater flexibility, but it can also make the transaction more operationally complicated.
Asset purchase vs share purchase
| Share purchase | Asset purchase | |
| What you buy | Shares in the company | Selected assets and business operations |
| Company ownership | Buyer takes ownership of the existing company | Seller usually retains the original company |
| Assets | Remain within the company | Agreed assets transfer to the buyer |
| Liabilities | Buyer indirectly acquires the company with its existing liabilities | Buyer can generally agree which liabilities it assumes, subject to legal rules |
| Contracts | Usually remain with the same company, although change-of-control provisions may apply | May need to be assigned, novated or otherwise transferred |
| Employees | Continue to be employed by the same company | Employment transfer rules, including TUPE, may apply |
| Due diligence | Often broader because the buyer is acquiring the entire company | Can be more focused on the assets and liabilities being acquired |
| Complexity | Corporate ownership changes, but the underlying business remains in the same entity | Individual assets, contracts and relationships may need to be transferred |
This is a simplified comparison. The exact treatment will depend on the business and transaction.
Why might a buyer prefer an asset purchase?
An asset purchase can allow the buyer to be more selective.
You may want the trading business, customer relationships and equipment but not certain historic liabilities or parts of the company that aren’t relevant to your plans.
That ability to define exactly what is being acquired can be attractive.
However, selecting the assets you want doesn’t automatically remove every potential liability. Employment, tax, regulatory and other legal rules can still affect what transfers with the business.
Professional advice is important.
Why might a buyer prefer a share purchase?
A share purchase can sometimes provide greater continuity.
The company remains the same legal entity before and after completion. The buyer simply becomes its new owner.
This can make the transfer of the underlying operation more straightforward, particularly where the company has numerous employees, contracts, licences and customer relationships.
But you are also acquiring the company with its history.
That makes due diligence particularly important.
What happens to contracts?
This is an important practical difference.
In a share purchase, contracts remain with the same company because the legal entity hasn’t changed.
However, some agreements contain change-of-control provisions that require consent or give the other party certain rights if ownership of the company changes.
In an asset purchase, contracts may need to be transferred to the buyer.
Depending on the agreement, this can require the consent of customers, suppliers, landlords or other parties.
If important contracts cannot be transferred, that could materially affect the acquisition.
What happens to employees?
In a share purchase, employees generally remain employed by the same company.
There has been a change in the company’s shareholders, but their employer remains the same legal entity.
In an asset purchase, the position can be different.
The UK’s Transfer of Undertakings (Protection of Employment) Regulations, commonly known as TUPE, may apply where a business or part of a business transfers to a new employer.
Employment matters should therefore be considered early in the transaction.
What about tax?
The tax treatment of an asset purchase and a share purchase can be materially different for both buyer and seller.
This can influence how each party would prefer the transaction to be structured.
There can be differences in areas including corporation tax, capital gains, VAT and stamp taxes, depending on the circumstances.
This is an area where specialist tax advice should be taken before the structure is agreed.
Which structure is better for the buyer?
There isn’t a universal answer.
An asset purchase can provide greater control over what you acquire and may help isolate certain historic risks.
A share purchase can provide greater continuity and may be operationally simpler where the business has numerous contracts, employees and assets sitting within one company.
The right structure will depend on the particular business, the risks identified, the seller’s position and the tax implications for both parties.
It can also become part of the negotiation. The structure preferred by the buyer may not be the structure preferred by the seller.
Agree the structure early
Whether the transaction is expected to be a share purchase or an asset purchase should normally be discussed early and reflected in the Heads of Terms.
Changing the structure later can affect valuation, tax, financing, due diligence and the legal work required to complete the acquisition.
Before agreeing the structure, make sure you understand what you will actually own on completion, which liabilities you are taking on and what needs to transfer for the business to continue operating normally.
Find businesses and acquisition advisers on The Brokerage
The Brokerage connects buyers with business owners and brokers bringing businesses to market.
You can also use The Brokerage’s Professional Network Directory to find legal, tax, financial and other advisers who can help you assess the right structure for an acquisition and support you through the transaction.