Download LegalVision’s How to Sell Your Business Guide – essential reading for any seller looking to understand the moving parts that will impact a successful sale.

The terms selling shares and selling the business might seem to denote the same action. From a legal perspective, they refer to two actions involving distinct processes with different consequences. This article discusses how the sale of shares differs from selling the business.

Selling Shares vs. Selling Business

At law, a company is a legal person (albeit an artificial one). This characteristic of a company means that it is a separate legal entity that exists independent of shareholders. Shares can be bought and sold, transferring ownership, yet the company itself will remain unchanged. As such, when a person sells their shares in a company, the purchaser acquires the whole company – assets as well as liabilities.

Conversely, when a person sells their business, they typically sell the business’ assets. The buyer can specify which assets it wishes to buy, and the parties apportion the purchase price among them. The purchaser does not usually take on any liabilities of the business. Of course, a purchaser can choose to purchase a liability if they believe that it is in their commercial interest to do so. However, it is not an inherent incidence of buying the business, unlike buying the shares.

The Process of Buying Shares

Understandably, the inherent difference between selling shares in a company and selling the business means that a purchaser will undertake a slightly different process before sale.

Any buyer of the shares in a company will likely understand the risks associated with acquiring a company’s liabilities. They should undertake extensive due diligence before the purchase takes place. This process calculates the cost of all known liabilities. In regards to any future liabilities, a purchaser should also try to:

  • locate them;
  • identify them; and
  • figure out the costs associated.

These could include the likelihood of future legal action against the company.

A buyer will also need to carefully examine all of the company’s existing licences and contracts and see whether they include a change of control clause. These clauses could provide that if control of a company changes (through changes in share ownership), the parties have the right to renegotiate the terms of the contract or terminate it altogether.

The purchaser will also need to examine the company’s existing employment relationships. While the company’s employment situation will not necessarily change as a result of a change in share ownership, the purchaser will need to verify any costs associated with all the existing employment entitlements.

The Process of Buying a Business

Conversely, purchasing assets is a more straightforward process. The sale of business agreement will need to specify all the assets under purchase as well as any liabilities. Assets can include items such as:

  • equipment;
  • stock; and
  • land.

However, a purchaser will need to ensure that they acquire all the assets necessary to achieve their commercial objectives.

For example, an important asset for most businesses is their intellectual property (e.g. trade marks). The purchaser would likely insist that the seller includes all of the business’ intellectual property in the sale.

Similarly, the intended buyer will need to verify the business contracts that require assignment.

For example, if a business leases their premises, the landlord will probably have the right to approve any assignment of the lease.

Furthermore, the purchaser will have to decide whether to take on the seller’s existing liabilities in regards to employee entitlements. When a vendor sells the assets of a business, the current employee relationships do not automatically end. The seller is usually required to terminate the employment agreements and pay any outstanding entitlements. A purchaser may choose to assume this liability for a reduction in purchase price.

Furthermore, purchasing shares, as opposed to assets, also has different implications regarding taxation. For example, capital gains tax and stamp duty.

Key Takeaways

Whether a purchaser buys shares in a company or the assets of a business depends on their commercial objectives and their willingness to take on risk. It also depends on the particular assets that a seller is willing to sell. If you have any questions about buying or selling shares or a company, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Download LegalVision’s How to Sell Your Business Guide – essential reading for any seller looking to understand the moving parts that will impact a successful sale.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Carole Hemingway

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