Buying a business - shares or assets?

What happens?

The seller transfers their shares in the company to the buyer, giving the buyer control of the company.

The buyer and seller agree which assets and liabilities will transfer. Assets and liabilities not included in the transaction generally remain with the seller. This is sometimes described as “cherry picking”.

What happens to the business liabilities after sale?

The company retains its existing liabilities, including known and unknown liabilities. Buyers commonly seek protection through due diligence, warranties, indemnities and contractual liability limits.

Only the liabilities agreed to be assumed by the buyer generally transfer, subject to applicable law. The seller retains the others, although certain liabilities may transfer automatically or by operation of law.

How does the transfer work?

Shares in the company are transferred to the buyer, which may be an individual or a corporate entity.

Each asset must be transferred using the appropriate method, such as assignment, novation, conveyance or delivery. Third-party consent may be required for some contracts and assets.

Is Stamp Duty payable?

Stamp duty is generally payable by the buyer at 0.5% of the chargeable consideration for a transfer of shares, subject to applicable exemptions and reliefs.

Stamp duty may apply to certain assets, particularly shares. Land and property may attract Stamp Duty Land Tax (SDLT) in England and Northern Ireland, or the relevant land transaction tax in Wales or Scotland.

Is  VAT payable?

A transfer of shares is generally exempt from VAT, although the wider VAT treatment should be checked.

VAT may not be chargeable where the transaction qualifies as a transfer of a business as a going concern (TOGC) and the relevant conditions are met. Otherwise, VAT may apply to some or all of the assets.

Is Capital Gains Tax (“CGT”) or Corporation Tax payable?

The seller may be liable to CGT if an individual sells shares, or Corporation Tax if the seller is a company, subject to any available reliefs or exemptions. Special rules may apply to deferred consideration and earn-outs.

The seller may be liable to Corporation Tax or CGT on gains arising from the disposal of assets, depending on the seller and the assets involved. Reliefs may be available in some circumstances, so specialist tax advice is important.

What happens to employees?

The employing company remains the employer, so a share sale does not normally trigger a TUPE transfer. However, changes following the sale may raise employment law issues.

TUPE may apply where the transaction involves a relevant transfer of a business or undertaking. Where it applies, employees generally transfer to the buyer with their employment rights protected, and information and consultation obligations may arise.

What legal documents are needed?

Documents commonly include a share purchase agreement, stock transfer forms, a disclosure letter and any required transitional services or ancillary agreements. Directors may resign on completion where appropriate.

Documents commonly include an asset purchase agreement, transfer documents for individual assets, required third-party consents, TUPE-related documents where applicable, and any transitional services or ancillary agreements.