In Short
- Selling shares involves transferring ownership of the company’s shares, while selling a business entails transferring the business’ assets.
- The choice between selling shares or the business impacts tax obligations, liability, and the transfer of existing contracts and employees.
- Consider strategic, financial, and legal implications when deciding between the two options.
Tips for Businesses
When deciding between selling shares or selling your business, evaluate the tax implications, liability considerations, and impact on existing contracts and employees. Consult with financial and legal advisors to fully understand the consequences of each option and align your decision with your strategic business goals.
If you operate a business through a company and are considering selling your business, you need to decide whether you want to sell:
- ownership of your shares in the company; or
- the assets of the business.
These are two different types of sales with different consequences. This article discusses some of the key points in how selling shares differs from selling your business assets.
Key Commercial Difference Between the Two Transaction Structures
A key commercial difference between the two transaction structures is in the nature of what the buyer acquires.
Share Purchase
In a share purchase, the buyer acquires ownership of an entire company by purchasing its shares. This transaction results in the buyer taking control of all the company’s assets, liabilities, and ongoing business operations. When a buyer purchases shares, they effectively step into the shoes of the previous owner. The company continues to exist as a legal entity, with the buyer now controlling it. This means that all existing contracts, employee relationships, and business arrangements typically remain in place, subject to any change of control provisions in those agreements.
Change of control provisions are crucial considerations in share purchases. These clauses in contracts or agreements may be triggered when ownership of the company changes hands. They could require consent from the other party to the contract. Or, in some cases, allow the other party to terminate the agreement.
Asset Purchase
In an asset purchase, a buyer acquires specific business assets from another company. This type of transaction does not automatically transfer existing business contracts or trading arrangements to the buyer. The buyer must arrange for the transfer of these contracts separately, typically through novation or assignment.
The assets acquired in this type of transaction may vary widely. They could include tangible items like equipment, inventory, or real estate. They can also include intangible assets such as intellectual property, customer lists, or goodwill. However, it is important to note that the assets purchased may not always be sufficient on their own to operate a complete business.
Comparing Risks in Share Sales vs Business Sales
As a buyer, a share sale can be risky because the buyer is taking ownership of the company. This includes the company’s liabilities. A potential buyer will want to conduct thorough due diligence to ensure it understands what assets and liabilities exist in the company.
Continue reading this article below the formRisks
To reduce the risk to the buyer, the buyer will want you to enter into a share sale agreement that includes detailed warranties and representations concerning the shares and the business. This way, the buyer can protect themselves from any unexpected losses they suffer due to taking ownership of the company.
Share Sales vs Business Sales
The table below outlines some of the key differences between selling shares and selling a business.
| Subject | Selling Shares | Selling Business |
| Ownership of the Company | The ownership of the company has changed. For example, if you currently own all the shares in ABC Pty Ltd and sell those shares to a buyer, you will no longer own ABC Pty Ltd. Instead, the buyer will. | The ownership of the company remains unchanged. For example, if you currently own all the shares in ABC Pty Ltd and sell its cafe business, the buyer will own the cafe business, but you will continue to own ABC Pty Ltd. |
| Ownership of the Business and Assets | The ownership of the business remains unchanged. For example, if Co Pty Ltd owns a software business, even if the share ownership in Co Pty Ltd changes, Co Pty Ltd, as a separate legal entity, will continue to own the software business. | The ownership of the business has changed. For example, if Co Pty Ltd sells its software business, all assets of the business will transfer to the buyer. The business will no longer be owned by Co Pty Ltd and will now be owned and operated by the buyer. |
| Liabilities | If you sell all the shares in your company, the buyer is taking ownership of the company. Therefore, they are taking control of the company’s assets and liabilities. | Typically, when you sell a business, the buyer will not take on the company’s liabilities which were in existence before completion of the sale. If the buyer does take on certain pre-existing liabilities, such as employee entitlements, they may negotiate a reduction in the purchase price to account for this. |
| Sale Document and Form of Transfer | Share purchase agreement, share transfer form, and delivery of share certificates (if applicable). | Asset purchase agreement, transfer provisions in asset purchase agreement, plus any specific transfer documents required for the type of asset. |
| Due Diligence Focus | On the target company as a whole, including all of its assets and liabilities. | On the particular assets being acquired. |
| Business Contracts | The contracts related to the business will not need to be transferred because the ownership of the business remains unchanged. However, before a share sale, you should consider whether any contracts have ‘change of control’ clauses. This is where a sale of a substantial portion of the company’s shares requires the counterparty’s consent or provides a right for the counterparty to renegotiate or terminate the contract. | As a result of the business changing ownership, you will need to transfer any contracts related to the business to the buyer. The buyer will then take over responsibility to perform the obligations under those contracts. You can typically complete this process through a novation of the contract from you to the buyer, which will also require the consent of the relevant counterparty. |
| Employees | The employer of the employees is unchanged (i.e. the same company owns the business). However, because the buyer now controls the company, they may choose whether to keep on all of the existing employees or not. | The employer of the employees has changed (i.e. the buyer now owns the business). You will need to transfer the employees to the buyer. This can either be achieved by novating the existing employment contracts to the buyer or terminating the old contracts and the employees entering into new contracts with the buyer. |
Want to sell your business? A share sale may be beneficial compared to an asset sale. Download our free Guide to Share Sales today.
Key Takeaways
Selling shares and selling a business are different types of sales. The considerations you need to have in mind, and the consequences resulting from the transaction, will vary. They can depend on whether you are:
- selling shares; or
- selling a business.
The legal documents you will need and the process involved will also vary. It is essential to understand which transaction is more appropriate for your goals. And also consider key considerations to keep in mind in either case.
If you need assistance with a share sale or a business sale, our experienced sale of business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A share sale is where the shareholders of a company sell their shares. This gives majority control of the company to the buyer. If you sell your company, this means that the buyer will take ownership of the company. Although the underlying ownership of the company has changed, the ownership of the business has not. The business remains owned by the same legal entity, being the company.
An asset sale is where a seller sells assets used to operate a business such as client lists, trade marks and equipment. If you sell a business, you are selling all, or most, of the assets which comprise the business and you will be transferring those assets to the buyer.
You will likely need a share sale agreement when conducting a share sale. In a share sale, the buyer is taking over ownership of the company, including the company’s liabilities. To reduce the risk to the buyer, the buyer will want you to enter into a share sale agreement. This will likely include detailed warranties and representations concerning the shares and the business. It is beneficial for you to enter into a share sale agreement too. This will ensure the terms of the sale, such as how you will be paid the purchase price, are clearly set out and legally binding.
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