Buying a limited company through the acquisition of its share capital (often referred to as a share sale) is a complex process. Many buyers wish to cherry pick the assets of a business and leave behind the liabilities. Unfortunately this is at odds with the nature of a share sale where the buyer buys the company ‘warts and all’.
A seller will generally prefer a share sale to an asset sale as it usually provides a much more tax efficient means of selling the business. A business owner can sell the shares and potentially claim entrepreneurs’ relief on the capital gains tax liability which, at the time of writing, is just 10% subject to certain lifetime limits.
There are other reasons too. It is generally less disruptive to the business, as a minimum all that will change are the shareholders in the company. There is no need to transfer any key assets, contracts or properties which can all come with their own complications. In addition, the employees will stay with the company so there will be no TUPE transfer which in itself can be complex.
So what is involved in a share sale?
As a minimum the shares in a company can be transferred with a single form. However, as with all business sales the principle of ‘buyer beware’ applies, so a well advised purchaser will carry out a significant amount of legal due diligence and require contractual protections against any skeletons lurking in the cupboard. These will usually comprise a series of warranties (statements about the general well-being of the business) and indemnities (promises by the seller to pay for specific liabilities which may arise after the sale has completed). These protections will usually be included in a share purchase agreement which will often run to 100+ pages and require detailed advice. A seller will normally provide a disclosure letter to the buyer setting out any problem areas which if not disclosed could lead to a warranty claim. The process of drafting and agreeing these documents is of vital importance for the buyer of a limited company.