When it comes to transferring a business there are two basic methods to consider: a share transfer or an asset transfer. Gannons can help you decide which method would suit your business so that your exit is both tax efficient and cost efficient. Our ideas may help you in negotiating with the other side successfully as there are issues for the buyer and the seller arising under the alternatives as we explain below.
Let’s have a look at both with some key differences highlighted:
| Share transfer | Asset transfer | |
| If the shares in the selling company are sold then the control of the whole company is passed over by the seller to the buyer. The buyer can be a corporate entity or an individual sole trader. | What is needed? | If only specific assets of the company are desired, then the buyer and seller agree which assets and or liabilities are to be transferred. Any assets or liabilities not transferred remain with the seller – this is known as “cherry picking”. |
| All the known and unknown liabilities are transferred over. So a share transfer may be unattractive if there are unknown liabilities and nothing in place to protect the buyer or seller. For this reason there is usually a disclosure exercise (i.e. investigations before transfer) to highlight potential liabilities post-sale. Disclosure is followed by indemnities and warranties to limit and place caps on liabilities which the buyer inherits without an adjustment to the sale price which are typically included in the share sale contract. | What happens to liabilities of the company? | Only the assets and liabilities expressly agreed to be transferred are transferred to the buyer and those not transferred remain with the seller. This is usually done by differentiating between the ‘included’ and ‘excluded’ assets and liabilities in the asset transfer contract. Sometimes this may appeal to the buyer as it allows for certain liabilities to be left with the selling company. It is possible to transfer rights to intellectual property, domains and brand names to enable the buyer to trade under the name of the seller (if commercially attractive). |
| Shares in the selling company are transferred to the buyers. The buyer could be a company, an individual or both. | How does the transfer work? | Each asset or liability that is to be transferred to the buyer must be done separately by the seller either by way of assignment, novation or delivery. |
| Stamp duty is payable by the buyers 0.5% – but if a transfer is intragroup it is usually exempt. | Is there Stamp Duty? | Certain assets such as land may attract stamp duty. Most other assets are exempt from stamp duty. |
| No. | Is there also VAT? | VAT is not chargeable if the transfer qualifies as a ‘transfer of a business as a going concern’. Therefore in many cases VAT is not payable. |
| Yes – CGT is payable on the gain arising on the sale of shares. Where there is deferred consideration or the sale price is determined by reference to an earn-out special tax rules apply which we can advise on. | Is there also Capital Gains Tax (“CGT”)? | Yes – CGT is payable on the gain arising on the sale of certain assets. However, there are hold over reliefs to CGT reliefs available in some cases. Specialist review of the tax position is required which we can assist with |
| As the shares of the selling company are sold the employees contractual relationship with the selling company remains. Whilst TUPE does not apply (see opposite column) there can be employment issues if the buyer wants to harmonise employment contracts post sale or reduce the work force – specialist advice is needed here and this is an area of our expertise. | What happens to employees? | Employees are transferred automatically under the Transfer of Undertakings (Protection of Employment) Regulations 2006. TUPE exists to protect the right of employees and essentially makes changing the terms and conditions post-transfer complicated (although not impossible depending upon the facts and lapse of time between transfer and purported change). TUPE sets down rules and timescales for employee consultation about the transfer. |
| Share purchase agreement; stock transfer forms; details of disclosures made (the disclosure letter), transitional services agreement if facilities are to be shares; and any other specific agreements required for the transfer. Often the directors of the seller resign office upon completion. | What legal documents are needed? | Asset purchase agreement; confirmation of compliance with TUPE, third party consents required for the transfer of agreements such as landlord consent, supplier consent, transitional services agreement; and any other specific agreements required for the transfer. |
If your business is a partnership or LLP the issues are slightly different and we can advise on the process.
Written by: Prasan Modasia