In this week’s blog, we’ll be covering a recurring theme we see at IFA Acquisitions and that is the difference between a share sale and an asset sale. A topic taken from our recent YouTube video “Share Sale vs Asset Sale” which is part of a wider collaborative series with prestigious UK law firm Herrington Carmichael.
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Gary “When buying shares, there’s an ease of existing agreements in place and secondly, for the vendor, it’s attractive because it qualifies for business asset disposal relief (BADR), which is quite a tax efficient way of selling your business with only a 10% tax charge up to £1,000,000 (subject to qualifying factors set out by HMRC). But, the disadvantage for an acquirer is the fact that they are buying the business and all that goes with it, which is typically the risk of past advice. So you would expect there to be warranties, guarantees and covenants in those contracts to protect the acquirer. What is the effect of those on the vendor?”
Lawyers perspective on share purchase
Alex Canham said “Over the last three to four years, we’ve seen a big shift from asset transactions, which historically were the norm. They were the vast majority of transactions in the sector and for various reasons, partly to do with eligibility for what was then Entrepreneur’s Relief and is now Business Asset Disposal Relief, the transition to share purchases has been significant. The main benefit, I would say, to a buyer of acquiring shares is that they are bringing the business and all its assets from clients, staff and property across in one go. You don’t have to deal with re-papering, getting client consents to share data, novation of agencies and other things like that. But the downside to this is that you’ve then got that historical risk and people always talk about advice-based risk, but there are risks relating to property too, for example, dilapidations and if you have a long-term lease, potentially there’s liabilities relating to tax and compliance on that front. So, the scope of diligence that you have to do on a share acquisition is generally much broader, which means there’s greater cost. Meaning generally they take longer to do and then also when you get to the sales and purchase agreement (SPA), you’re in a situation where you’re having to take greater assurances from the sellers and rely on what they’ve told you to validate that through the purchase contract by asking them to stand behind it. Say ‘what you’ve told me is wrong, I’ve got some recourse under the purchase contract.’ So, from a contractual perspective, even though you might have some of those assurances that are there, you’re still taking that risk and what we always say is it’s all fine putting it in a contract, but you’ve got to be prepared to enforce that. So, doing the diligence at the outset is the best way to understand what you’re buying and try and at least identify where the risks might be as best you possibly can do. So again, that comes back to timing and cost at the outset of that process when everybody tends to want to move forward.”
Lawyers perspective on asset purchase
“On an asset sale side of things. The main benefit for buyers is this ‘cleaner’ acquisition basis, because ultimately you tend to cherry pick the assets you want. So, the business name, the goodwill, the clients, the benefits of the recurring revenues and the staff, tend to be more what people want. The downside, however, is that administratively there’s a lot to do. We see it quite a lot where people say, ‘we’ll just buy the assets’ and though that sounds great, when you get into the transaction process and you conclude that deal, you’ve got several questions for example; data protection, in terms of at what point can you contact clients and how do you go about doing that. Sellers are obviously a bit more reluctant to let buyers contact them before completion. You’ve also then got the issue with what’s going to happen with the business post acquisition. If it’s a directly authorised entity it needs to go to the FCA and then get that closed down. That tends to be a burden on the seller, because they are the ones that are left holding that limited company in most cases and they will need to go and make that application, shut the company down and then deal with the administration associated with that. That that tends to be the downside on asset sales, certainly in terms of administrative procedure.
How long does it take to liquidate a company?
Alex said “We tend to see that happening probably between 6 and 18 months of completion. A lot of times people set out and say, “We’ll do it very shortly after completion.” But, there’s two barriers to that. The first is normally the completion of the client transfers; getting the clients moved onto the buyers terms and conditions into the entity that is buying them, getting the novation for the agencies and things like that which are transferred across to the buyer and getting that process completed. Whilst this tends to be done relatively quickly, in the grand scheme of things perhaps within a couple of months, certainly on the novation of agencies side the client side of things can take a little bit longer because it’s all about engagement and number of clients and those other variables. Then you have to start the process of de-authorizing and as we’ve seen on change of control applications, the FCA are overwhelmed with different kind of applications at the moment from people related to buying or selling firms. That process in terms of de-authorizing can take anywhere between three to six months and that’s assuming that you don’t have any issues. So, expect longer delays where firms have got exposure to higher risk types of business, such as defined benefit pension transfers, particularly if they have any exposure to things like British Steel or the other political examples of the FCA taking a much closer look at. It’s not just the case of signing off that the deauthorization application, they want to understand what provision you’ve made for potential complaints. So, whether that is having run off insurance in place or leaving capital behind in the business, that process can generally take a number of months to play out.”
Gary “Like you say, capital adequacy would stay until the FCA allow you to take that away”
Alex “Absolutely. And then the next step is getting into the liquidation process at the end of that journey. This also takes a period of months going through the process with the liquidator.”
How long will I be bound to past advice?
Alex “So from a seller’s perspective, we would expect to see some parameters around any indemnities they give. Now, for those who might not know, an indemnity is effectively a commitment to reimburse the buyer if a certain event happens. So, if a complaint comes in from clients or the FCA raised that investigation, for example, the buyer will probably have an indemnity in most share transactions that says the seller will underwrite the cost of that and we can take that off your next deferred payment or you will repay it to us. Now normally, and I think it’s certainly fair to say it’s a market standard expectation, they will have some time limits on them, depending on the acquirer. We are seeing time limits between three and seven years. I would say on most transactions, it’s unusual to get it less than three years unless you’ve got a perhaps a very small business or perhaps it’s not quite representative or something like that where the risk profile is different. But if you’ve got a directly authorized firm between three and seven years is probably about right. Anything longer than seven, we would be saying that’s unusual and long.”
There is no real definitive answer to the age old question comparing share and asset sales, they both have pros and cons of their own and rely heavily on external circumstances. In order to find out what may be the best option for you and your business contact us for a free confidential chat:
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Herrington Carmichael disclaimer
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
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