Previously we looked at some points to consider when buying a company through purchasing its shares (read previous article here). Here we are looking at a business purchase where it is the assets of the business that are being bought.

Unlike a share purchase which is often favoured by the seller for tax reasons, an asset purchase is often favoured by a buyer due to the ability to be more selective about what is bought. Of course, where the business in question is not owned and run by a limited company but by a sole trader or partnership then there will be no shares and so it will be an asset purchase anyway.

An asset sale generally only passes those assets and liabilities that are specified in the contract, together with any liabilities to the employees of the transferred business, under rules known as ‘TUPE’. Therefore, a seller will often retain liability to pay off suppliers and other creditors in relation to the business at the point of completion. Those creditors will generally include any bank borrowing or equipment finance. If the seller does retain the liability to pay off creditors, then it is quite likely that the seller may also wish to be able to receive money due from the customers of the business at completion.

For a buyer under an asset purchase, while some care needs to be taken in relation to TUPE, the risk of inheriting other liabilities is reduced and so less effort may need to be devoted to that aspect, meaning that an asset purchase can involve less expense on legal fees than with a share purchase.

Another difference between an asset purchase and a share purchase concerns the business premises. If the company that owns the business already owns the premises then the sale of the shares of the company will automatically bring the premises across with the company. With an asset purchase, separate documentation will be required to transfer the property (whether freehold or leasehold). Complications can arise with leasehold transfers where personal guarantees are given by, for example, the company’s directors or where a rent deposit has been paid to the landlord, since the buyer may need to take on those liabilities from the seller.

If you are considering either buying or selling a company, then we would be delighted to discuss any aspect of it with you.