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For many business owners, the real money they make from their company is when they go to sell it. Leading up to that day much of the monetary benefit enjoyed tends to cover compensation for the time spent in the day-to-day running of the company rather than extraction of the value they’ve built in the business.
When the time comes to sell, business owners often approach accountants or business brokers to get a valuation for their business. However, no single valuation can capture the numerous factors that impact on price. This article, an extract from a more in-depth version on my site, covers one of them – the structure of the sale which, on its own, can have more of a material influence on price than the business’ earnings!
To properly understand the difference between these two, we need to establish two facts which will be known to most business owners, but which I include here for purposes of completeness.
The first is that a limited company is a legal entity. It owns things and owes things. It can go bust. It stands separate to the owners of the business.
The second is that the owners of the business own shares in the business but own none of the assets in the business and they are responsible for none of the business’ liabilities.
Business sale transactions generally happen as either a sale of the shares of the business or a sale of the assets.
The former involves a transaction between the investor and the business owner. The investor pays funds into the owner’s personal bank account. This is payment for the shares of the business and a share transfer is lodged at Companies House to record the fact that the company has a new owner. The investor effectively steps into the shoes of the vendor. There is no change to the business operation - not to staff, to customers, to assets or to liabilities. There is no transaction to be recorded in the accounts of the business. The business continues without missing a beat. The investor gets a mandate to operate the bank account, a login to the business website and keys to the warehouse. He owns everything in the business.
An asset sale is a transaction between the investor and the business, not the business owner. The investor pays the agreed price into the business account, not to the owner personally. No transfer is recorded at Companies House. What does change is the business balance sheet – all the assets forming part of the sale are transferred to the investor and these asset accounts are adjusted accordingly (the balancing transaction being the payment the investor made into the company bank account). If 100% of the assets are sold, the business is still owned by the original owner but it’s a shell of a business, it’s one that holds mostly liabilities plus a chunk of cash in the bank which was received in exchange for all the assets it previously had on the books.
There is no simple answer. Investors generally prefer to buy assets rather than shares as it’s a cleaner and easier transaction for them. Vendors prefer to sell shares as, for them, that is not only a cleaner transaction, but has tax advantages. Where a vendor is willing to structure the transaction as an asset sale he would typically extract a much higher price from the investor.
Key advantages of an asset sale
Key negatives of an asset sale
Key advantages of a share sale
Key negatives of a share sale
Opting for one form over the other is a matter for negotiation between the vendor and investor. Circumstances of the individual business will play a key part in the decision and
parties who are being represented by a legal or corporate finance firm should rely on their advisers for guidance on how each option impacts on their exit goals and, importantly, on their overall tax obligations. Where the vendor or investor is being advised by a business broker it would be prudent for them to seek professional legal advice as well.