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A share sale is where you purchase a company through a share transfer from the existing shareholders. Alternatively, an asset sale is where you purchase some or all of the business’ assets. Each kind of purchase has its own advantages and disadvantages. A share sale is advantageous since the transfer is simple and you can continue to operate the business as normal. This article will set out three benefits of buying a business’ shares instead of its assets. 

Simplicity of a Share Sale

Share sales are relatively simple and straightforward, particularly when compared to asset sales. However, they still require a significant due diligence process and a comprehensive check of the business’ information. Although, the actual transfer of ownership is considerably simpler under a share sale. This offers a range of benefits to both you as the purchaser and the vendor.

You may conduct a share sale with everything in the company going to the purchaser. Accordingly, you do not need to renegotiate or recommence contracts or other agreements like you would in an asset sale. For instance, regulatory licences can usually transfer simply to the purchaser. In an asset sale, these kinds of licences do not transfer, and there are additional costs and logistics involved. You also do not need to liquidate a vendor company as you often do in an asset sale. This saves on costs and resources. For the vendor, a share sale is typically more tax efficient. 

Maximising Goodwill, Brand and Existing Relationships

A share purchase can be particularly beneficial when the business in question has a powerful brand and plenty of goodwill. In this case, it is often a good idea to capitalise on these traits. You can do this by continuing the business on its own name and with its existing employees, suppliers and other contracts. Buying the assets of the business, especially if only selecting certain assets, tends to erode this potential advantage. 

There is also the benefit of maintaining the business’ existing relationships and property. As the business’ commercial contracts, business names, leases, and intellectual property are already in the company’s name, there is no need to formally assign contracts and other property. Hence, you usually do not need third parties to sign off on these as you might with an asset sale. 

Business as Usual for the Business’ Employees

A final benefit with a share purchase is that employees in a sale of business remain unaffected. There is an ability to continue with the business’ existing workforce, which ensures a smooth transition. Consequently, you can re-enter ‘business as usual’ as soon as possible. Alternatively, in an asset sale, the employees’ employment ceases when the business is sold. The purchaser then needs to enter into new employment agreements, and many employees may choose to leave the business at that time. 

An additional consideration is that in New Zealand, an employee protection provision within employment agreements will cover the business’ employees. This makes restructuring more difficult as you will need to abide by the employment protection provision. When you buy a business and value its workforce and leaders’ contributions, a share sale can maximise your opportunity to continue to benefit from their contributions. It is also much less disruptive for employees. 

Key Takeaways

Considering whether to purchase a business through an asset sale or a shares sale can be a difficult decision. There are both benefits and disadvantages of buying shares instead of assets. In terms of advantages, the key advantage of a share purchase is simplicity and ease of transition. This also translates to maximising the business’ existing goodwill, brand and relationships with customers and suppliers. Another significant benefit is the ease of keeping the business’ employees and workforce and encouraging a ‘business as usual’ approach. 

If you want to know more about purchasing a business through a shares sale instead of an asset sale, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

When is a share purchase of a business preferable to an asset purchase?

It depends on what you are looking for as the purchaser. Sometimes a share purchase might be preferable to an asset purchase, such as when you are looking to acquire the full business or looking to make the most of the business’ strong brand. Alternatively, you might prefer an asset purchase if you are primarily interested in acquiring specific business assets, or if there are significant liabilities or some other reason you do not want to acquire the whole business.

What happens to a business’ employees during a shares purchase?

The business’ employees continue to work under their existing employment agreements as they normally would, without any changes. This is very different from an asset sale, which ends the business’ employment agreements and causes greater disruption.

What happens to a business’ commercial contracts or agreements during a share purchase?

Commercial contracts and other agreements will continue as normal. during a share purchase. There is not usually any change, though there may be a new set of relationships with clients and suppliers to navigate as a new owner.

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