Share Purchase Agreements and Asset Purchase Agreements
There are two primary ways to purchase a business. The first is to purchase all of the shares of the company through which the business is conducted. This is known as a share purchase and is effected via a Share Purchase Agreement (SPA).
The second is to purchase the business, as a going concern, together with the assets which are used in connection with the business. This is known as an asset purchase and is effected via an Asset Purchase Agreement (APA).
Share Purchase Agreements
With a share purchase, the buyer takes on all of the interests, benefits and liabilities of the company. Therefore it is of critical importance for the buyer to carry out a detailed Due Diligence exercise in order to ascertain the potential risks and liabilities associated with the target company.
An SPA will set out the terms on which the buyer is willing to purchase the business from the seller, including:
- The consideration payable – whether that be in one lump sum, paid over time (deferred consideration), or be subject to earn out criteria
- Details of completion and any conditions which must first be satisfied prior to completion
- Warranties and indemnities given by the seller as to the state of affairs of the company prior to completion
- Restrictions on the seller following completion in order to protect the goodwill of the business
Do I need an SPA?
Whilst there is no legal requirement to enter into an SPA when buying or selling the share capital of a company, it is highly recommended that the parties do so.
Not only does an SPA provide clarity and certainty as to the terms of the share purchase, it also sets out the warranties and indemnities given by the seller and on which the buyer may rely should anything untoward be discovered post completion.
What happens to the employees of the company following a share purchase?
With a share purchase, the company and the business will remain the same post-completion. This is also true for the company’s relationship with its clients, customers, suppliers and employees (subject to any change of control provisions). Therefore the employees of the company, on the completion of a share purchase, will continue to be employed by the company on the same terms of employment as they enjoyed prior to the sale and purchase, and the company’s trading relationships will similarly continue.
Asset Purchase Agreements
An APA is the document under which legal ownership of the business and the associated assets pass from the seller to the buyer. The APA will be drafted to reflect the key commercial terms of the deal as agreed by the parties and as set out in the Heads of Terms.
An APA will deal will all matters pertaining to the purchase of the business including:
- Which assets are being purchased by the buyer
- Which warranties and/or indemnities, if any, are being provided by the seller in respect of the business and assets
- What limitations apply to any claim the buyer may make against the seller under the APA
- What, if any, restrictions the seller will be subject to post completion in order to protect the goodwill of the business
Do I need an APA?
There is no legal requirement for an APA to be agreed and signed when selling or buying a business but it is strongly advised not to complete a transaction without one.
An APA provides absolute clarity between the buyer and the seller with regard to what is being sold and purchased (and what is not), how much for, and how matters in connection with the business are to be dealt with. An APA is particularly important for a prospective buyer as any warranties or indemnities which may be contained in the APA both encourage the seller to be full and frank when disclosing information about the business and provide the buyer with a contractual right of action in the event that something untoward is discovered post completion.
Do I need tax advice when selling your business under and APA?
We would always recommend seeking tax advice in respect of any transaction regardless of its value or nature.
Tax advice is particularly important in respect of APA’s for both the buyer and the seller. It is common in an APA for the purchase price of the business to be split across the individual assets (equipment, property, goodwill, contracts etc.).
If the buyer is minded to sell any of the machinery or equipment following completion then they will seek to include as high a value as possible to these assets in order to minimise any possible Capital Gains Tax liability. Conversely the seller will be seeking to apportion a higher amount to intangible assets such as goodwill, which for them will be treated more favourably for tax.
Whilst we are unable to provide any advice in respect of taxation we will always work closely with your accountant in order to achieve the best possible result for you whether you are buying or selling.
For more information on the above, or to find out how Blacks’ Corporate team can assist you with an Asset Puchase or Share Purchase Agreement, please email or call us today on 0113 207 0000.