If your business is a limited company, a buyer can take it over in two ways. They can buy your shares, so they own the company and the business carries on inside it. Or your company can sell them the business itself, with its customers, equipment, stock and name, and they run it from a company of their own.
The two can look alike from the outside. But the choice decides what the buyer takes on and what happens to your team, and it changes the VAT and how much of the price reaches you after tax.
If you're a sole trader or in a partnership, there are no shares to sell. Any sale is a sale of the business and its assets, so the asset sale sections below are the ones that apply to you.
The two routes side by side
This is how they compare for the owner of a limited company.
| Share sale | Asset sale | |
|---|---|---|
| Who sells | You and any other shareholders | Your company |
| What's sold | The shares, and so the whole company | The business, or the parts of it the buyer chooses |
| Liabilities | All stay in the company, including ones from the past | Only those the buyer agrees to take, plus those that move with staff |
| Contracts and licences | Carry on, unless a contract says a change of owner lets the other side end it | Have to be moved to the buyer, often with the other side's consent |
| Staff | Same employer, so TUPE usually doesn't apply | Usually move to the buyer under TUPE |
| VAT | The going concern rules don't come into it | No VAT if the sale is a transfer of a going concern |
| Tax for you | Usually one layer, on your gain | The company is taxed on the sale, then you're taxed when you take the money out |
| Afterwards | You no longer own the company | You still own the company, with the money and anything not sold |
How a share sale works
In a share sale you, and anyone else who owns shares, sell them to the buyer. The company itself doesn't change. It keeps its name, bank account, contracts, staff and VAT number. On completion you sign a stock transfer form and the buyer pays Stamp Duty on it. The company then updates its register of members.
The catch, for the buyer, is that the company comes with its whole past. A tax error from three years ago or a claim from a former employee stays with the company, so it becomes the buyer's problem. That's why buyers in a share sale carry out more due diligence and ask for more promises in the sale agreement.
Those promises are where some of the risk comes back to you. If a statement you made about the company turns out to be wrong, the buyer can claim against you, usually within agreed limits on how much and for how long. A share sale gives you a clean break from the company, but not always from its past.
How an asset sale works
In an asset sale your company is the seller. It sells the business, or the parts the buyer wants, and the buyer runs it through its own company. The assets usually include the goodwill, which is the value of the business's name and customers, along with equipment, stock and any rights in the website or brand. Anything the buyer leaves out stays with your company, and that often includes the cash in the bank and any borrowing.
The asset purchase agreement
The main document is the asset purchase agreement. It lists what's being sold and what's left out, which liabilities the buyer takes on, and how the staff, contracts and premises move across. It also splits the price between the assets, for example between goodwill and equipment. That split affects the tax for both sides, so agree it with your accountant rather than leaving it to the end.
What's left in your company
After completion your company still exists. It holds the sale money and anything that wasn't sold, and it's still responsible for its debts and for anything it did before the sale. Those have to be settled before the money comes out to you, usually as a dividend or by closing the company through a members' voluntary liquidation.
Contracts and consents
In a share sale the company's contracts carry on, because the company is still the party to them. Read the main ones for a change of control clause, which lets the other side end or reopen the contract if the company changes hands. Leases and large customer contracts are the usual places to find one.
In an asset sale each contract has to be moved to the buyer, and most need the other side's agreement. A customer or supplier may use that moment to change the terms. A lease is usually assigned to the buyer, which normally needs the landlord's consent. Where the lease says consent can't be unreasonably withheld, the law in England and Wales requires the landlord to decide within a reasonable time and give written reasons for any refusal.
The customer list moves to a new owner too, so data protection law applies. The Information Commissioner's Office expects both sides to treat it as part of their due diligence.
Licences and registrations are often tied to whoever holds them. A nursery shows how this works. In a share sale its Ofsted registration stays with the company. In an asset sale the buyer can't provide childcare on the premises until it has registered itself, or Ofsted has approved adding the premises to its existing registration. Our guide to selling a nursery covers this. Check your own sector's rules early, because they can set the timetable.
Your team and TUPE
In a share sale the company stays the employer, so nothing changes legally for your staff and TUPE usually doesn't apply. GOV.UK says the identity of the employer must change for TUPE to protect staff in a business transfer.
In an asset sale TUPE usually does apply. Employees in the business move to the buyer automatically on their existing terms, and their continuous employment carries on. The duties and liabilities connected with their contracts move too, so this is the one set of liabilities a buyer of assets can't leave behind. Your company has to give the buyer details of the staff, known as employee liability information, at least 28 days before the transfer, and each employer has to inform staff representatives about the transfer and consult them about any changes it plans. Smaller businesses can often do this directly with their staff. Our guide to TUPE when you sell a business goes through the detail.
VAT and transfers of a going concern
When a VAT-registered business sells its assets, VAT would normally be charged on them. If the business is sold as a going concern, the sale isn't treated as a supply for VAT, so no VAT is charged. HMRC calls this a transfer of a going concern (TOGC) and sets out the rules in VAT Notice 700/9. The main conditions are these.
- The assets are sold as part of a business that's trading, not as a collection of assets.
- The buyer intends to use them to carry on the same kind of business.
- If your company is VAT registered, the buyer is registered already or becomes registered as a result of the transfer.
- If only part of the business is sold, that part can operate on its own.
- There's no significant break in trading before or immediately after the transfer.
Premises can need extra steps. If your company has opted to tax the building, the buyer has to opt to tax it too and notify HMRC in writing by the date of the transfer, or earlier if a deposit paid to your company has already created a tax point. It also has to confirm to your company that its option won't be disapplied. If it doesn't do both, VAT is charged on the property even if the rest of the sale qualifies.
The rules are compulsory, and HMRC says the seller is responsible for getting the treatment right. If VAT is charged when it shouldn't be, the buyer can't reclaim it and your company has to refund it. Getting it wrong can also bring penalties and interest. The buyer can apply to take over your VAT number, but your company's VAT liabilities then pass to the buyer too.
How the tax differs
In a share sale you sell your own shares, so you're usually taxed once, on your gain. Business Asset Disposal Relief can lower the rate on qualifying gains if you meet its conditions, which include working in the company and holding a minimum share of it for the two years before the sale.
In an asset sale your company is the seller, so it pays Corporation Tax on any profit it makes on the sale. You're then taxed again when you take the money out, whether as a dividend or when the company is closed. Two layers of tax usually leave you with less of the same price. Sole traders and partners sell the assets themselves and pay Capital Gains Tax on the gain, so there's only one layer.
The buyer's tax runs the other way. A buyer of assets can usually claim capital allowances on equipment, which lets it deduct the cost from its profits, and that can make an asset purchase worth more to it. A buyer of shares takes on the company's tax position as it stands. Stamp taxes differ too. The buyer pays Stamp Duty on shares, and a buyer of land or buildings in an asset sale may pay Stamp Duty Land Tax.
So compare offers on what each leaves you with after tax, not on the headline price. If a buyer wants assets, you can ask for a higher price to make up some of the difference.
Who usually prefers which
Owners of companies usually prefer a share sale, because there's one layer of tax and nothing left behind to wind down. Buyers often prefer assets, because they choose what they take and leave unknown problems behind. Where a deal lands depends on the business. A company with a tidy history and contracts that would be hard to move tends towards a share sale. One with something awkward in its past, or where the buyer wants only part of it, tends towards an asset sale.
What to settle before heads of terms
The structure belongs in the heads of terms. Before you sign them, be clear on these points.
- Whether it's a share sale or an asset sale, and what's included or left out.
- For an asset sale, which liabilities the buyer takes on and how the price is split between the assets.
- Which contracts and consents are needed, and who is responsible for each.
- For an asset sale, whether it's expected to be a transfer of a going concern for VAT.
- What each structure leaves you with after tax, worked out by your accountant.