Asset sale vs share sale: which is better?

One of the first and most important decisions in any business sale is the structure. Are you buying and selling the assets of the business, or the company that owns them? The choice affects price, risk, tax, and how much work the deal takes. This guide explains the two structures in depth and how to decide between them.

The two ways to buy or sell a business

When a business changes hands, it happens in one of two ways.

In an asset sale, the buyer purchases the individual assets that make up the business, such as plant and equipment, stock, goodwill, the business name, customer lists, and the benefit of key contracts. The legal entity that ran the business, usually a company, stays with the seller. The buyer takes the business, not the company.

In a share sale, the buyer purchases the shares in the company that owns the business. The company itself does not change. It keeps its assets, its contracts, its employees, its history, and its liabilities. What changes is who owns the company. The buyer steps into the seller's shoes as the new owner of the whole entity.

That difference sounds technical, but it drives almost everything else about the deal. Everything below flows from it.

Why the distinction matters so much

The central point is what comes with the business. In an asset sale, the buyer can usually pick and choose which assets and liabilities to take, and generally leaves the company's history and unknown liabilities behind. In a share sale, the buyer takes the company as it is, warts and all, including liabilities that may not be obvious on the surface, such as tax exposures, past contractual claims, or employee entitlements that have built up over years.

The way we put it to buyers is this. An asset sale is like buying the furniture out of a house. A share sale is like buying the house with everything in it, including whatever is hidden in the cupboards. That is why a share sale needs much deeper due diligence, and why the contract has to work much harder to protect the buyer.

The buyer's perspective

For a buyer, an asset sale is usually the safer structure. You take defined assets, you can leave behind unknown liabilities, and in some cases you get a tax advantage because the assets can be acquired at current value. The main work is making sure the assets you are paying for, especially contracts, leases, and intellectual property, can actually be transferred to you, because many cannot be transferred without the other party's consent.

A share sale can still suit a buyer where the value of the business is tied up in the company itself. That is common where the company holds licences, permits, or contracts that cannot easily be transferred, or where keeping the same entity avoids disruption to customers and suppliers. But the price of that convenience is risk, so a buyer in a share sale needs thorough due diligence and strong protections in the contract, which we come to below.

The seller's perspective

For a seller, the incentives often run the other way. A share sale lets the seller exit cleanly, walking away from the company and, with it, its liabilities and obligations, which an asset sale can leave the seller still holding. There can also be tax reasons a seller prefers a share sale, including potential capital gains tax concessions, though that is squarely a question for the seller's accountant.

An asset sale can leave the seller with an empty company, residual liabilities, and the task of winding things up. So it is common to see a buyer pushing for an asset sale and a seller pushing for a share sale, with the final structure settled as part of the negotiation, alongside the price.

Tax and duty

Tax and duty frequently decide the structure, and they sit at the intersection of law and accounting. The structure affects capital gains tax, the GST treatment, including whether the sale can be treated as the supply of a going concern, and transfer duty. These consequences can be significant, and they differ for buyer and seller.

We are deliberately not giving tax figures here, because the right answer depends on the parties' circumstances and must come from the accountant. The important point is that the tax and duty analysis should happen before the structure is locked in, not after, because it often changes the decision. We work alongside your accountant on exactly this.

How the contract differs

The structure also changes the contract itself. An asset sale agreement focuses on identifying and transferring each asset, dealing with the assignment of contracts and the lease, the transfer of employees, and apportioning what is included. A share sale agreement focuses on the shares, and leans heavily on warranties and indemnities, promises by the seller about the state of the company, with the buyer's remedy if those promises turn out to be wrong. In a share sale, those warranties are a large part of what protects the buyer from the company's hidden history.

Either way, due diligence feeds directly into the contract. What you find should shape the price, the conditions, and the protections. There is a separate article in this series on due diligence when buying a business.

How we help

We advise buyers and sellers on which structure serves them, work with your accountant so the tax and duty position is settled before the deal is locked in, run the due diligence, and draft or review the sale agreement so the risks are allocated the way they should be. The structure decision is made once, early, and it shapes the whole transaction, so it is worth getting right from the start.

Frequently asked questions

What is the main difference between an asset sale and a share sale? In an asset sale you buy or sell the individual business assets, leaving the company behind. In a share sale you buy or sell the company itself, including its liabilities and history.

Which is better for a buyer? Often an asset sale, because the buyer can take defined assets and leave unknown liabilities behind. A share sale can suit where value is tied to the company, but it needs deeper due diligence.

Which is better for a seller? Often a share sale, because it lets the seller exit the company and its liabilities cleanly, and there can be tax reasons. The structure is usually negotiated.

Does the structure affect tax? Yes, significantly, including capital gains tax, GST, and duty. The tax analysis should be done with your accountant before the structure is settled.

Keep reading

• Business sales and acquisitions
• Buying a business: a legal due diligence checklist
• Restraint of trade clauses when buying or selling a business

This article contains general information only and is not legal advice. For advice about your situation, please contact us. Liability limited by a scheme approved under Professional Standards Legislation.