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If you are looking to buy a business and your seller is a sole trader or a partnership then of course your choice is narrowed to one – an asset sale. However, if they run the business through a limited company or, increasingly, a limited liability partnership, then your first decision is the choice about whether to purchase the assets of the company or the shares in the company. There are advantages and disadvantages to both options:-

Asset Sale Agreement

Advantages   

  • An asset purchase generally involves you in fewer risks and therefore the contract and transaction are more straightforward and less involved.
  • You will not have any liability for the debts of the business arising prior to your purchase to take over. These will still be the seller’s problem.

Disadvantages

  • You will be an entirely new owner of the business and therefore you will have to ensure that all the different parts of the business are legally transferred including any properties, employees or contracts. This makes it harder to keep the deal quiet!
  • The seller is a company and so, unless there is an express arrangement to the contrary, any warranties or guarantees they give are given by their company, not them personally. We would therefore be looking for personal guarantees.

Share Sale Agreement

Advantages       

  • You will step into your seller’s shoes as shareholder / director but the employees, contracts, properties etc will remain in the company’s ownership. There is therefore no need for the assets of the company to be transferred and this means a share sale can often be completed without any third party involvement making it far more discreet.
  • Warranties are great but the body giving them must be able to stand by them. When you purchase shares, any warranties or guarantees given by your seller are (unless the sale is of a subsidiary company) given by them personally.

Disadvantages

  • At the end of the transaction you will inherit your seller’s company which means you will also inherit any problems (such as outstanding tax bills) that exist at the date of sale.
  • Because you inherit a company, a share purchase generally involves you in far greater risk than an asset purchase and therefore the contract and transaction are more involved and more warranties (including warranties relating to the payment of tax) will be necessary to protect you.

For more information please contact David Heys at Lawson-West Commercial on 0116 212 1000.