As an entrepreneur, the decision to sell your business is a major one. Once you’ve decided to sell, the next big decision is how you’re going to sell the business, either selling shares or selling the assets of your company. We’re going to break down the differences between a share sale and an asset sale, the advantages and disadvantages of each, and how to choose the right one for you and the needs of your business.
Definition and explanation: Share sale vs. Asset sale
Before we get too far ahead of ourselves, we should look at the definitions of the two types of sales that we’re going to be digging into.
A share sale is when the buyer purchases shares of your company, which include the value of all assets, liabilities, and contracts. The buyer becomes the new owner of the company, and all assets and liabilities are transferred to the new owner.
An asset sale is when the buyer purchases only the assets of the company, not the shares. The buyer will generally choose the assets that they want to purchase and will leave behind any liabilities. The seller retains ownership of the company and the buyer does what they want with their new assets, even including starting a new company.
Advantages vs disadvantages
There are countless advantages and disadvantages to sharing sales and asset sales if you dig deep enough and look at your business’s unique needs and demands. Here are some of the most commonly experienced or those with the highest potential value for new business owners, small business owners, and entrepreneurs.
Share Sale Advantages
- Much simpler transaction process
- There is no need to transfer ownership of each individual asset
- Create potential tax advantages for the seller
- All liabilities are transferred to the buyer
Share Sale Disadvantages
- Potential for future liabilities
- Limited control for the buyer
- Creates the potential for complex and costly tax implications for the buyer
Asset Sale Advantages
- Control over which assets to purchase
- Reduced level of risk for the buyer
- Potential for tax benefits for the buyer
- No need to purchase unwanted assets or liabilities
Asset Sale Disadvantages
- More complex transaction process
- The need to transfer ownership of each individual asset
- Creates the potential for future liabilities for the seller
- Creates the potential for disputes over which assets and liabilities are being transferred
Choosing the right type of sale one for your needs
Suppose you’re considering selling shares or assets for your company. In that case, the ultimate decision is going to depend on several factors, including the buyer’s needs, the tax considerations of the seller, and the complexity of the transaction.
If a buyer is looking to acquire the entire business, including all current assets and liabilities, a share sale may be the best option. If the buyer is only interested in specific assets or wants to avoid taking on liabilities, choosing to sell the assets may end up being the better choice.
Sellers should also consider any potential tax implications when deciding between an asset sale or a share sale. Share sales may create considerable tax advantages for the seller, while asset sales create tax benefits for the buyer.
Consider the sale of stock to investors
A third option that doesn’t always get the attention that it should, is considering the sale of stock to investors. This is a way of selling a business to those who would then have an interest in seeing it grow and succeed, but it also has some caveats.
This type of sale will need careful consideration of the structure of the sale and offers. The seller must provide potential investors with detailed information about the company, including details about its financial performance, management team, and prospects.
There are substantial benefits to selling stock to investors. One major benefit is the ability to raise capital without taking on or creating additional debt. This also results in the potential for their continued involvement in the company.
There are a couple of disadvantages that also come along with selling stock to investors. One is the inevitable dilution or even loss of controlling interest in the company. Another is the need to disclose or provide detailed financial information to potential buyers, who may not end up buying.
Advantages and disadvantages of a sale through an auction
For some businesses, selling through an auction may be the best option. Selling a business through an auction can be a highly effective way to generate interest and attract potential buyers.
An auction is a great way to provide unbeatable financial transparency during the entire sale process. This can create a significant sense of security in the buyers, while also ensuring that all potential buyers have an equal opportunity to bid on the business.
If selling a business through an auction, there are some advantages and disadvantages to consider. One of the biggest advantages of selling a business at an auction is the potentially far higher sale price and quicker transaction process. S
ome of the disadvantages include having to deal with the cost of hiring an auctioneer or auction house to perform the auction services, and the potential for many auctions to only attract low-ball offers.
Advantages and disadvantages of a sale through a single buyer
Another method of selling a business is to sell it through a single buyer. Selling a business to a single buyer has the potential to be a much more straightforward process than even selling through an auction.
In this type of company sale, the seller has far more control over the transaction and the negotiations can be conducted directly with the potential buyer.
Just as with any other sale type, selling to a single buyer will have advantages and disadvantages unique to this particular method.
A major attraction for a sale to a single buyer is the potentially higher price, with another being the greatly increased transaction process. Some of the disadvantages include the potential for a lack of buyer competition, and the need for the seller to conduct due diligence on the buyer to ensure they have the resources or capital needed to complete the transaction.
Things to know about selling different types of companies
While the type of sale will have a considerable impact on the sale process, another major consideration is the type of business being sold. Here’s what you need to know about selling to different types of companies, and how the process may differ from one to another.
Sole proprietor
Selling a sole proprietorship is one of the most straightforward company sales processes that there is. Selling a business as a sole proprietor means you don’t have to worry about any of the considerations you may need to make for shareholders or partners. The seller is the sole owner of the business and has complete control over the entire sale process. The buyer will generally purchase all of the business assets and assume any existing liabilities.
On the other hand, selling a sole proprietorship can also include some risks. The seller may end up personally liable for any outstanding debts or potential legal issues associated with the business. This means that it’s essential for the seller to conduct due diligence on the buyer, as well as seek expert legal advice, to minimize potential personal legal risks.
Partnerships
Selling a partnership may be more complex than selling a sole proprietorship, since there may be one or more partners to consider. In partnerships, all partners in the business must agree to the sale. Any profits or losses from the sale must be allocated among the various owner partners, based on their overall ownership share.
Additionally, the potential buyer must agree to assume the liabilities of the partnership, which may require additional special negotiations. This is why it is crucial to have a comprehensive partnership agreement in place. It’s also important to seek legal advice before selling to ensure the sale process goes as smoothly as possible.
LLPs
If your business is an LLP or limited liability partnership, a sale will require the approval of all partners and may require the transfer of the partnership’s assets to a new entity. The buyer must also assume any outstanding liabilities that come with the partnership.
LLPs are most commonly found in the professional services industry, such as law firms, accounting practices, and private medical practices. When selling an LLP, having a solid partnership agreement is a good start, just as consulting an experienced business attorney.
LLCs
LLCs, or limited liability companies, have a sales process that is similar to a limited liability partnership but offers the buyer more flexibility in their options for structuring the purchase. The seller of the LLC may be required to dissolve the LLC once the sale transaction has been completed.
LLCs are popular for small business owners and entrepreneurs due to their significant flexibility and liability protection. However, selling an LLC can require some additional legal as well as tax considerations. Legal and accounting consultation are often needed before an LLC can be sold smoothly.
PLCs
Selling a public limited company, or PLC is one of the more complex sale processes. This is because the company must comply with various securities laws and regulations. PLCs are typically larger companies that have gone public and must consider the goals and opinions of their shareholders.
Sometimes the sale process for public limited companies requires approval from shareholders. In some cases depending on who the buyer and seller are, approval from regulatory agencies may also be needed.
If this is the case with your PLC, you should know that obtaining regulatory approval can take significant amounts of time. This can add considerable costs to the sale process. Selling a PLC without significant legal counsel and accounting advice can lead to significant legal ramifications.
Things to know about selling a business in trouble
In some cases, owners of companies that are struggling or otherwise in financial trouble will consider selling their company. Selling a company that is struggling financially can be challenging, even difficult, but it can be done. Below are a few things to keep in mind when doing so.
Selling a business in administration
If a business is “in administration”, it means that an insolvency practitioner has been appointed to manage the company’s affairs, usually by a court.
The sale process will be overseen by the administrator. They will seek to maximize the value of the business for the benefit of creditors.
The administrator will generally conduct a review of the business’s operations, assets, and liabilities to identify potential buyers. They will also subsequently determine the best approach to a sale. The sale process itself may be conducted through a formal auction or a negotiated sale with a single buyer. Selling a business in administration can be challenging, but in many cases, it can be the best option for a struggling business, as it can potentially reduce debts and liabilities, and even save jobs for employees.
Selling insolvent companies
A company that is “insolvent” means it cannot pay the debts of the company as they become due, and selling the company can become much more complex. For sales of insolvent companies, the buyer may need to negotiate with the company’s creditors and directors to reach a satisfactory sales agreement.
Final thoughts on selling a business
When you’ve built a company from the ground up, deciding to sell the business can be one of the biggest decisions of your life up to that point. Understanding the different options for selling the company and the impact of the sale based on the type of business you’re selling is crucial for achieving the best outcome.
Whether you’re selling shares and assets, offering stock to investors, or even selling at auction or to a private single buyer, you’ll need to carefully consider your needs and the potential tax implications and the complexity of the potential sale.
By understanding all of these variables and the advantages and disadvantages of each type of sale, entrepreneurs can make much more well-informed decisions about their business. What are your thoughts on selling a business? Leave a comment and start a conversation.