Differences between business and company transactions

There are three basic types of 'business' acquisition:

  • The sale of a company - this is actually the sale of shares in a company (a separate legal person in the eyes of the law). Normally all the shares would be purchased, but occasionally just a majority stake is sold, leaving a minority interest outstanding. The assets of the company are not actually transferred. Rather, ownership of the company transfers to the purchaser, who indirectly becomes the owner of everything the company owns, whether or not he wants them all and whether or not he know about them all. The employees remain the employees of the company at all times. In general, share sales are more advantageous to vendors.

  • The sale of a business - this is the transfer of a 'going concern', a business. A business is normally a collection of assets. These will be tangible and intangible, ranging from cars and stock (tangible) to the benefit and burden of contracts and the 'goodwill' of the business (intangible). There is no share transfer, but there will normally be many ancillary agreements to transfer the tangible and intangible assets into the name of the new purchaser; such as 'novations' and/or 'assignments' of contracts. Employees transfer automatically to the purchaser because of the TUPE Regulations. In general, business sales are more advantageous to purchasers, not least because they can choose which assets (and any liabilities) to take on.

  • The sale of assets - this is the sale of a collection of tangible or intangible assets that do not together make up a 'going concern' or a business 'undertaking'. The major difference between a business sale and a true asset sale is that normally goodwill is not transferred on a pure asset sale. Unlike a business sale, no employees will transfer automatically and the sale will be subject to VAT in the same way as if the purchaser were buying office equipment from a normal retailer.

'Pure' asset sales are not really what is meant by the term 'mergers and acquisitions', whereas share/ company sales and business sales most definitely are. Confusingly, business sales are often wrongly referred to as 'asset' sales; so whatever terminology is being used in each case it is important to remember what is actually being transferred - is it the shares of a company, a mixture of assets and employees that actually run a business, or simply a collection of assets that do not together constitute a business?

In both business and company transactions the purchaser will require extensive investigation of exactly what is being acquired, and whether there are any problems. This is called 'due diligence'.

However, there are significant differences in the procedure and effects of business and company transactions which may lead a purchaser or a vendor to choose one route in preference to the other.

The major consideration is normally taxation, but apart from that the following factors might also be considered:

Benefits of business sale/ disadvantages of share sale Benefits of share sale/ disadvantages of business sale
In a business sale the purchaser can 'cherry pick' those assets that he wishes to buy, and only those assets will transfer. Liabilities of the business are actually liabilities of its owner, and those will not transfer unless this is specifically provided for and agreed by the purchaser. By contrast, in a share sale all the assets (and liabilities) of the company will remain with the company once it is sold unless they are transferred out of the company prior to the sale. The purchaser is buying the company 'lock, stock and barrel', and therefore more extensive due diligence will normally be required than on a business sale. In theory, all that is involved in a share purchase is the signing of stock transfer forms transferring the shares in the company to the purchaser. In contrast, in a business acquisition various assets will need to be transferred by separate agreements; and this can be time consuming, cumbersome and costly.In practice, though, the 'post-completion' aspects of a share sale can be as convoluted as in a business acquisition, not least because many contracts of the company (particularly distribution and franchise agreements) will contain 'change of control' clauses that require the other party to consent to a change of control of the company.
The recipient of the sale price is the owner of the business, who is also the person who needs to enter into the contract. Where a company sells its only business it will be left as a cash-rich 'shell', and the proceeds of sale will then have to be distributed to the shareholders (normally by dividends or winding up the company). Where the business was owned by individuals, such as partners, the sale price goes to them directly. Obviously this can be both an advantage and a disadvantage in different circumstances. The shareholders receive the sale price directly, and need to enter into the contract. Where the company sold was a subsidiary it will be the parent company that receives the sale price. Obviously this can be both an advantage and a disadvantage in different circumstances.
The purchaser can ensure that the seller of the business retains any liabilities (in particular, tax liabilities) of the business, unless he is prepared to take them on. The shareholders have a 'clean break'. Subject to any liability for the warranties and indemnities they will have given in the share sale agreement, and subject to any personal guarantees they gave for the benefit of the company, the former shareholders can 'walk away' from any problems the company was experiencing, or debts it had. Those become the responsibility of the purchaser, as the new shareholder in the company. For this reason warranties and indemnities in favour of the purchaser are normally more comprehensive in a company sale than in a business sale. However, warranties are ultimately only useful if those providing them remain solvent and in a jurisdiction where they can easily be sued; for this reason, sometimes the sale price is payable in tranches and/or deferred until a certain point (usually post-completion accounts some time after the sale) in order for the purchasers to ensure that the entire price is not paid until the company performs as required after the sale. This mechanism can be used on either business or company sales.
  The corollary of the 'clean break' for the seller on a company sale is that the purchaser can enjoy the benefit of trade continuity. Although ownership of the company may have changed, to the outside world very little will appear to have changed and normally customers and suppliers will continue to trade with the company as before, often unaware that its ownership has changed. In contrast, customers notified of a business sale are likely to review the terms of contracts and will often seek to renegotiate and gain better terms. Where the business assets include leasehold property, it is normally necessary to obtain the landlord's consent to assignment of the lease; this is not normally obtained quickly and in any event the purchaser will need to pay the landlord's legal fees. Certain suppliers may seek to profit from the sale of the business; IT companies are notorious for demanding further licence fees in order to consent to an assignment of rights to use software after a business sale.
The requirements of the Financial Services Legislation are potentially onerous on a share sale. In a business sale they almost always do not apply. As mentioned above, on a share sale there is no change of employer, whereas on a business sale TUPE applies to transfer the employees automatically to the purchaser. In general, unless specific legal advice is obtained, it is more likely in a business sale than a share sale that any dismissals effected around the time of the acquisition will be found to be unfair dismissals.