Definition
In an asset sale, the buyer purchases selected assets of a business, such as equipment, stock, customer contracts and goodwill, and most liabilities usually stay with the seller's company. In a share sale (a stock sale in the US), the buyer purchases the company itself, including all of its assets, liabilities, history and contracts. The choice affects tax, risk, which contracts need consent to move and how employees are treated.
Goodwill is the part of a purchase price above the value of a business's identifiable assets, less its liabilities. It reflects things like reputation, customer relationships and trained staff.
Worked example
Two fictional buyers each pay R8,000,000 for fictional South African courier businesses of a similar size.
- The first buys the vehicles, customer contracts and brand of Swiftline Couriers in an asset sale. An old tax dispute usually stays with the seller's company. Each customer contract and vehicle finance agreement has to be transferred with the other party's consent or signed again.
- The second buys all the shares in Protea Express (Pty) Ltd, a fictional company, in a share sale. Contracts stay with the same company, but when an old tax dispute surfaces, the liability sits inside the company the buyer now owns.
Why buyers care
Buyers often prefer asset sales because they can leave unknown liabilities behind. Sellers often prefer share sales, which can suit their tax position and give them a clean exit.
In a share sale, thorough due diligence plus warranties and indemnities do much of the work of protecting you. In an asset sale, the risk shifts towards transfer: licences, leases, permits and contracts may not move to a new owner without consent. Employees stay with the company in a share sale, and in some countries, such as the UK under TUPE, they can also transfer automatically with the business in an asset sale. The right structure depends on your country, the business and both sides' tax positions, so take advice from a lawyer and a tax adviser early.
Due diligence is the investigation a buyer carries out before committing to a purchase, testing the finances, contracts, legal position and operations against what the seller has described.
Warranties are the seller's statements of fact about a business in the purchase agreement; indemnities are promises to reimburse specific losses. Together they decide who bears risks that diligence could not rule out.