Understanding the Difference Between a Share Sale and Asset Sale 

For business owners selling, an area that causes a lot of confusion is whether the sale should be an asset sale or a share sale. 

Each approach has distinct legal, financial, and tax implications that can significantly impact both buyers and sellers. Below, we explore the key differences and implications of these two methods to help business owners make an informed decision to suit their requirements 

What Is a Share Sale? 

A share sale involves transferring ownership of the company itself by selling its shares. The buyer acquires the entire entity, including its assets, bank accounts, invoices, debtors & creditors, liabilities, contracts, and obligations. 

Advantages for Sellers 

Simplified Process: Sellers transfer the company as a whole with bank accounts, employment agreements, supplier agreements, intellectual property, assets and inventory in place. The buyer also gets to choose whether they would look to take on existing debt should it be on terms advantageous to the buyer. 

Disadvantage for Sellers 

Warranties: The seller would need to take on warranties to protect buyer against historical issues that might appear for business/product practice and/or tax issues. 

Disadvantages for Buyers 

Liability Risks: Buyers inherit all liabilities of the company, including contingent or unknown liabilities such as lawsuits or tax obligations. 

Due Diligence Requirements: Extensive legal and financial due diligence is necessary to identify potential risks and draft warranties to protect their interests. 

What Is an Asset Sale? 

An asset sale involves selling specific assets of the business rather than the entity itself. Assets can include tangible items (equipment, inventory) and intangible items (intellectual property, goodwill). 

Advantages for Buyers 

Selective Acquisition: Buyers purchase the assets of the company rather than the company. They set up a new clean company with all the tangible and intangible assets of the company. 

Disadvantages for Sellers 

Complex Transfers: The assignment of existing contracts with clients, suppliers, and employees to the new entity can be risky. This is especially problematic if there are Agency or franchise agreements in place. 

Key Implications 

Liabilities 

In a share sale, liabilities automatically transfer to the buyer. Sellers may need to provide warranties or indemnities to cover potential risks. There are options for buyers to offer a ‘cash free, debt free’ which as description sounds no cash in bank and all debts paid off. 

In an asset sale, the buyer purchases tangible and intangible assets of the business but not bank accounts, invoices o liabilities. 

Business Continuity 

Share sales preserve existing contracts and relationships since the entity remains unchanged. 

Asset sales require renegotiation of agreements and may disrupt operations during the transition. 

Choosing Between a Share Sale and Asset Sale 

The choice depends on various factors: 

• Sellers can prefer to share sales for simplicity, tax efficiency and where it would be make sense to preserve existing contracts and relationships.
• Buyers typically favour asset sales to avoid inheriting liabilities and gain tax benefits.

In some cases, hybrid structures combining elements of both methods may be beneficial.  

Conclusion 

Deciding between a share sale and an asset sale requires careful consideration of legal risks, tax implications, and business continuity.  

Consulting with legal and financial experts is essential to navigate these complexities effectively. 

Whether you’re selling or buying a business, understanding these distinctions will empower you to structure transactions that align with your goals. Get advice. 

If you would like to discuss what options might suit you best contact on our experienced NZ Business Brokers.