Asset sale vs share sale: what changes for buyer and seller

When a business run through a company is sold, the deal can take one of two broad shapes. The company can sell its business assets to the buyer, or the shareholders can sell their shares in the company. The trading business might look identical either way, but tax, risk, paperwork and price can be very different. Buyers and sellers often prefer opposite structures, so it pays to understand why before negotiations start.

If the business is run by a sole trader, a partnership or a trust without a company, the choice may not arise in the same way: there are no shares to sell, so the sale is of assets or of trust interests. The principles below still help explain what a buyer is weighing up.

What is actually being sold

Asset sale

In an asset sale, the entity that owns the business sells selected assets to the buyer. These usually include goodwill, plant and equipment, stock, intellectual property, the business name and the benefit of certain contracts. The seller's entity stays with the seller, along with anything not included, such as cash, debtors, most liabilities and the entity's history.

Share sale

In a share sale, the shareholders sell their shares. The company itself does not change. It keeps all its assets, contracts, employees, liabilities and history. The buyer simply becomes the new owner of the company.

Risk and liabilities

This is usually the biggest difference for a buyer.

• Asset sale: the buyer chooses what to take on. Past tax debts, old claims and historical compliance problems generally stay with the seller's entity. That is why buyers of small businesses often prefer this structure.
• Share sale: the buyer inherits everything the company has done, known and unknown. A tax audit of a prior year or a claim from a former customer becomes the buyer's problem. Buyers manage this through more extensive due diligence, detailed warranties and indemnities from the seller, and sometimes by holding back part of the price.

For a seller, a share sale offers a cleaner exit in one sense, as the whole company leaves. In another sense it brings more exposure, because the seller gives promises about the company's history that the buyer can enforce after settlement.

Contracts, leases and licences

• Asset sale: contracts are with the seller's entity, so each one the buyer wants must be assigned or replaced. Leases usually need the landlord's consent to assignment. Customer, supplier and finance agreements may need consent too. Licences and permits may need to be reissued in the buyer's name.
• Share sale: contracts generally stay in place because the contracting party has not changed. But many agreements contain change-of-control clauses that require consent or allow termination when ownership changes, so they still need checking.

Your lawyer should review the key contracts and the lease early, because a refusal of consent can delay or derail a sale under either structure.

Employees

In an asset sale, employees' employment with the seller ends and the buyer offers new employment to those it wants to keep. The Fair Work Act's transfer of business rules can carry certain terms and entitlements across, and the treatment of accrued leave needs to be agreed. In a share sale, the employer does not change, so employment simply continues and all accrued entitlements stay with the company. Our article on employee entitlements when a business changes hands explains more.

Tax: the seller's side

Tax outcomes can differ significantly, and the details depend on the seller's circumstances.

• Share sale: individual shareholders who have held their shares for at least 12 months may be eligible for the general 50% CGT discount, and potentially the small business CGT concessions if additional tests about the company and the shareholders are met.
• Asset sale by a company: the company makes the gain. Companies are not eligible for the general 50% CGT discount, and getting the proceeds out of the company to the owners raises further tax questions. The small business CGT concessions may still apply, but the outcome can be quite different from a share sale.

The concessions are complex, and the tests for a share sale are stricter than for a direct asset sale. Our overview of small business CGT concessions covers the basics.

Tax: the buyer's side

• Asset sale: the buyer records the assets at the price paid. Depreciating assets such as plant and equipment can be depreciated from that new cost. How the price is allocated across goodwill, plant and stock therefore matters to both sides and should be agreed in the contract.
• Share sale: the company keeps its existing tax values for its assets. The buyer's cost is the price of the shares, which generally only becomes relevant when the buyer later sells them.

GST and stamp duty

An asset sale is a supply of the business and may attract GST unless it qualifies as a GST-free supply of a going concern. See our article on selling a business as a going concern. A sale of shares is generally treated differently for GST.

Stamp duty depends on the state or territory, the type of assets and the structure. Some states charge duty on certain business asset transfers and some on landholder companies whose shares are sold. Check the position for your state with your lawyer or adviser before you agree a structure.

Which is better?

There is no universal answer. As a broad illustration:

• buyers of smaller businesses often prefer an asset sale because it limits inherited risk;
• sellers often prefer a share sale for its potential tax advantages and cleaner exit;
• a share sale may be the only practical route where valuable contracts, licences or permits cannot easily be transferred.

The final structure is often a negotiated point. A seller who insists on a share sale might accept a lower price, or provide stronger warranties, in exchange. A buyer who insists on an asset sale might pay more to compensate the seller for a worse tax outcome.

Agree the structure early, ideally in the letter of offer or heads of agreement, because it shapes the price, the due diligence and the contract.

How we can help

Kainos models the after-tax outcome of both structures for sellers and the risks and benefits for buyers, so that decisions are made on the real numbers. We advise and represent clients through negotiation and due diligence, working alongside their lawyer on the sale contract. To talk about the right structure for your deal, contact us or read about our business structuring service.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.