More often than not, the topic "asset vs share sale" has been discussed and debated at length. Although there are some aspects to consider, that could be beneficial to both parties and solely for the benefit of the other. Below are a few aspects to consider when deciding on a share/asset sale:
Sale of shares transaction:
In layman's terms, a buyer would be acquiring the incorporated business. This would include the assets and liabilities, goodwill, and inherent aspects of the business that would not have been capitalised.
The valuing of any business can prove to be a particularly complicated exercise. There are various aspects to consider as well as some key financial indicators. There may be sound reasons as to why specific objectives were not met in the past, but it is important that the buyer is aware of these permutations and understands the reasoning behind it. Likewise, a buyer would also be able to see opportunity/value in certain revenue streams, whereby the seller has been unable to secure orders in the past due to a variety of reasons. In a South African environment, Black Economic Empowerment status, vendor registration with key customers, integrated systems and technology, etc. are all aspects considered as intangibles and have been proven very difficult to value. These are often subject to interpretation and most of the time the buyer would find reasons to reduce the company's value, purely because of personal interpretations and assumptions made.
In many cases, all shareholders are not always amenable to selling their share portion, as they might have alternative motives or plans for the business. To reach a successful outcome, it is important that all key stakeholders reach a consensus from the onset of the overall strategy and growth plan that they would like to achieve. The Articles of Association and/or the Shareholder Agreement may restrict shareholders from selling their shares.
Third party approval of the transaction is sometimes required, and this can often prove problematic and delay or even completely nullify the deal. An example would be a Landlord that often proves difficult when it comes to transferring the lease to a new owner. Their lawyers may require the buyer to come up with large deposits, provide personal guarantees, agree to a higher rental or require the new tenant to extend the lease term. This could prove detrimental to the transaction and there is a fine line to balancing the objectives of the respective parties.
From a seller's point of view:
- The sale: A share sale would be regarded as the simplest way in disposing of a business. Subject to any arrangement/warranty commitment agreed between the buyer and seller during an agreed period, the seller would be relieved from his/her obligation.
- Time: The seller may want to expedite the sale, however a purchaser will take his time when deciding on an acquisition. They would want to examine as much information as possible, extending the length of time to complete the transaction. Sale of share transactions typically takes longer to complete than the sale of asset transactions.
Furthermore, the buyer's legal team and advisors will insist on various protections for their client and would want the seller to provide warranties, guarantees and indemnities to limit any risk on behalf of the purchaser. The negotiating of these terms can also contribute to further delays in the successful completion of the transaction.
- Personal sureties: Over the years, the seller may have offered personal sureties to various parties.
When selling a business, these parties will generally not want to release or waive any sureties that are in place or transfer them to the new owner. These loans/liabilities will generally have to be cleared by the seller if he wants to be relieved of his/her responsibilities under the personal surety
If the seller fails to remove himself as a surety, he/she will put themselves in an onerous position and is exposed to risk in the sense that he/she has no control of the business, once sold.
- Professional fees: Share sales are more expensive when it comes to professional fees as there is usually more work involved, during the due diligence phase and the legal process.
From a buyer's point of view:
- Tax advantages: Should there be an accumulated loss existing in the company, those losses can usually be carried forward to be written off against future tax liabilities.
- Risk: Buying shares is a lot riskier for the buyer as they would be taking on all the business liabilities, and the true nature/cost of some of the liabilities may not be fully apparent until a year or two down the line. There could also be liabilities that the buyer had not discovered during the due diligence process.
- Transfer: Generally, customers and suppliers' relationships would transfer over seamlessly. The business continues operating without any major interruptions and by acquiring the shares, the buyers become owners of the assets (tangible & intangible) and associated liabilities.
Asset sale transaction:
As mentioned earlier, the buyer would prefer an asset sale as opposed to a share sale. This is purely because the buyer would have identified the key assets to produce future income, not take ownership of any associated liabilities, and would limit their exposure to unidentified liabilities held against the company.
A buyer would be able to write off wear and tear allowances against the assets purchased, thereby creating a favorable tax structure for the acquirer.
In terms of an asset valuation, this can also prove to be very complicated as there are a couple of methods of determining asset value, with the following methodologies applied:
- Value in use
- 2nd hand value
- Book value
- Replacement value
- Expected useful life (Overall state of assets)
A buyer would normally dictate the method to be used, however there must be a consensus between the seller and the buyer when determining a value.
A buyer would typically drive an asset value down as far as possible, but would need to substantiate this together with independent valuations, market trends and foreseeable production. Similarly, the seller would like to ensure his value is protected and supported by trade history and sound future projections.
Intangible assets such as patents, trademarks and customers lists are always difficult to value. However, when they are backed with a legal document that helps create barriers to entry or where a service level agreements have customers tied in with long-term contracts, this assists the buyer in determining value and alleviates the seller from encouraging the buyer.
From a seller's point of view:
- Better negotiating power: As buyers prefer to buy assets, the seller can often negotiate to get a higher net benefit for himself under an asset sale than a share sale. The seller is taking on the responsibility (and cost) of clearing the liabilities and would therefore require a higher reward.
- Quicker sale: As there is less due diligence required for the buyer to perform in an asset sale, the transaction can often be completed more quickly.
- Retained assets: The seller can choose which of his assets will be sold and which will be retained.
- Taxation: Sellers will be exposed to CGT as well as withholding tax.
From a buyer's point of view:
- The due diligence process is less cumbersome and far easier; Assets still need to be thoroughly assessed and the true value of the assets needs to be determined. However, less emphasis needs to be placed on creditors, as these assets will be unencumbered, once sold.
- Tax advantages: The buyer will in many cases be able to attribute the purchase price as the base cost of the new asset, and accordingly be able to claim wear and tear allowances against a greater amount.
When the buyer purchases assets from the seller's company, they may agree on a value for the entire set of assets, however the assets could later be revalued, once recorded in the books of the acquirer.
- Loss of customers: It is important to effectively communicate to all customers the change of control and ensure there is minimal disruption to any client relationships.
- Suppliers: The same applies to suppliers, and the sale needs to be effectively communicated with each supplier to ensure that critical relationships are not hindered.
- Assets transferred: Where there are numerous individual assets - there are different routes to securing the title and can prove to be a time-consuming exercise. For example, the transfer of a licence works differently than the transfer of a lease, which works differently than the transfer of patents.
For a variety of legal, accounting and tax reasons, some deals make more sense as share deals while others make more sense as asset deals. Often, the buyer will prefer an asset sale while the seller will prefer a share sale. The decision on which route to go will be imperative and forms as the crux of the matter for every negotiation required to conclude a transaction successfully.
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