Why a seller or buyer prefers share sale vs asset sale is crucial to making informed decisions in an M&A deal.
Introduction
Merger and acquisition (M&A) activity has been on the rise in the Middle East in recent years particularly in the UAE, as the country continues to position itself as a hub for business and investment in the Middle East. MENA M&A Insights 2022 report prepared by EY showed that the number of mergers and acquisitions in the Middle East and North Africa rose 13% on an annual basis last year to 754 transactions, with the UAE topping M&A activity in the region.
As such, it is important for business owners, investors, and other stakeholders to understand the
fundamental concepts and strategies involved in M&A deals. Over our next few videos, we will be discussing various M&A concepts and strategies that are essential to understanding and successfully executing M&A transactions. Today, we will focus on the difference between a share sale vs asset sale, two common methods of selling a business.
Understanding the pros and cons of each method and why a seller or buyer may prefer one over the other is crucial to making informed decisions in an M&A deal. So, let’s dive right into it.
Basic Differences Between Share Sale vs Asset Sale
In a share sale, a selling shareholder is selling their shares in a company. The buyer purchases the company – a separate legal entity. Typically, the company continues to retain its assets and liabilities. The transaction is between the company’s shareholders and the buyer of the shares. It is the composition of the ownership of the company that changes.
The alternative is that the company itself, not the shareholder, sells some or all of its assets, so it
might be machinery, might be goodwill, or customer contracts, and in that case, the company is the recipient of the proceeds of the sale.
Pros & Cons of Share Sale vs Asset Sale and When to Opt for Either Option
When considering whether to opt for a share sale or an asset sale, both the seller and buyer will need to weigh the advantages and disadvantages of each approach, based on their specific circumstances.
From the seller’s perspective, a share sale can be an attractive option if they want to exit the business entirely, as the sale of shares effectively transfers ownership of the company to the buyer.
A share sale can be a simpler transaction as it doesn’t require transferring each individual asset. The seller transfers ownership of the entire company, including all assets and liabilities, to the buyer. This method can also be advantageous for a seller because they are not required to identify and transfer each asset separately, and the transfer of ownership can happen quickly.
Share sales can also be beneficial for tax purposes as the seller may be able to claim capital gains tax relief, depending on the jurisdiction and specific circumstances of the sale.
On the other hand, a buyer may prefer an asset sale if they only want to purchase certain assets of
the company such as intellectual property, real estate, or equipment, without taking on the risks and obligations of the entire company. It can also be beneficial for buyers who want to purchase a distressed business with significant liabilities, as the buyer can choose which assets to acquire and avoid taking on any liabilities or legal claims that may exist.
Share Sale vs Asset Sale
From the seller’s perspective, an asset sale can be more challenging than a share sale, as it may require a more complex legal and financial process. This is because the assets being sold need to be identified and transferred individually, rather than through a single transaction as in a share sale.
Additionally, a seller may have to pay taxes on any gains made from the sale of the assets, which can reduce the overall proceeds from the sale.
Conclusion
In conclusion, the decision to opt for a share sale or an asset sale will depend on the specific
objectives and circumstances of the parties involved in the transaction. Both methods have their
advantages and disadvantages, and it is essential to carefully consider the risks and benefits of each approach before making a decision. Professional advice from legal and financial advisors is also highly recommended to ensure that the transaction is structured correctly and achieves the desired outcome for both the buyer and the seller.
