When buying or selling corporate assets, there are a number of important implications that you need to be aware of, each relating to the type of transaction you are considering. Whether you own a large corporation or a small business, your corporate assets are likely to be highly valuable and important to you, so any purchase or sale will require meticulous planning and preparation. It is therefore highly important to seek legal advice before you consider buying or selling any corporate assets. A lawyer that specialises in corporate law will be able to advise you on the types of sales, your liabilities, tax and market values.
Asset sales and share sales
The first consideration is whether you are entering into an asset sale or a share sale. An asset sale applies only to the purchase of the company’s tangible and intangible assets. This is the most effective way to buy corporate property without encountering corporate liabilities or tax implications, as the buyer does not have to take on any previous company debts. It offers the greatest tax benefit to the purchaser, avoiding the need for stamp duty land tax (SDLT), which can add another major cost to a corporate sale.
Asset sale prices will often be set slightly higher than share sale prices. This extra cost offsets the cost to the buyer in possible recapture income. Recapture income is the difference in value between the property purchased by the buyer and the depreciated value of these assets – this is common in these types of transactions. Often a seller will end up selling an asset for less money than its recorded value; this difference is the recapture income.
When participating in an asset sale, there are possible downsides for the buyer. An important consideration is that of employee contracts. These terms typically remain the same as they were under the ownership in which they were set. Therefore, it can be difficult for the buyer to alter any contractual obligations even after the sale has taken place.
A share sale is when all of the business or assets are sold to the buyer in their entirety – this means everything from the business’s registered name, to its debts and tax liabilities. Sellers are also eligible for lifetime capital gains tax exemption in selling through this method, meaning that tax will not be due on that sale. This is generally the preferred transaction among sellers, and is typical for those seeking an exit strategy.
Share sale buyers will have to take on all outstanding tax, even if it was incurred when they were not owners. As a buyer of a share sale, it is extremely important that you seek legal advice to ensure you are fully aware of any tax or legal issues that the business has been involved in. As a new owner, you must be aware of what you will be liable for, and a specialist legal firm will be able to perform a thorough due diligence, bringing any issues to your attention. Any liabilities that the business has suffered will impact the value of the assets and give you greater negotiating power. Awareness of liabilities will also prevent you from any unwanted surprises after the sale.
Seek legal advice
Knowledge is power when negotiating, whether you are buying or selling corporate assets. This is why obtaining specialised and thorough legal advice prior to the transaction will help you to reach the best deal.
This article was supplied by Prosperity Law LLP.