At some point during your business life cycle, you will likely consider selling some unnecessary assets to get a bit of extra cash or look to find a buyer to take on your company. If you are considering the latter, you may consider the pros and cons of a share sale versus an asset sale. With assets, there are two types that you will accumulate over time – tangible assets (such as property and supplies) and intangible assets (such as patents and trademarks). Whatever your reasons for selling assets, you will need to find a buyer willing to pay a fair price. There is then the issue of depreciation, chargeable gain and ensuring you are tax compliant.
You will likely accumulate many different kinds of tangible and intangible business assets during your business journey. Your tangible assets will include business vehicles, equipment, supplies and property - whereas intangible assets will be your copyrights, trademarks and patents.
Some of your assets will be worth keeping for the life of your business, while others might become less of a necessity over time. You will need to identify the ones no longer required and calculate the most appropriate time to sell to achieve maximum return on your initial investment.
Whether you want to make some revenue or are preparing to completely sell your business, divesting unneeded assets can help put some cash back into your business. This article aims to provide you with the first stepping stones of knowledge to sell your business assets.
THE DIFFERENCE BETWEEN SHARE SALE AND ASSET SALE
There are two usual methods of transferring the business to new ownership, share sale or asset sale. Your chosen approach will be influenced by legal, financial and personal factors that impact both you and the buyer.
The main difference between share sale and asset sale is the nature of what the interested buyer acquires:
1. Share Sale – The buyer attains the shares of the company that owns the trade and assets of the business. This option allows the business to continue running on a "business as usual" basis. The new owner will acquire all the company's assets, liabilities and obligations.
2. Asset Sale – The buyer will own the assets which make up the business. For example, the buyer will acquire both tangible assets (such as property, land, machinery and stock) and intangible assets (such as intellectual property and goodwill).
In general, a share sale is more attractive from a tax perspective to the seller than to a buyer. Whereas on the flip side, an asset sale is often more tax-efficient for a buyer than a seller. However, following recent HMRC tax adjustments, the advantage to the tax benefits to the buyer of buying trade and assets are to a lesser extent than they were in the past. Asset sales also now allow for a buyer to leave behind any parts of the business they consider too risky and do not take on past tax obligations.
THE PROS AND CONS OF SHARE SALES AND ASSET SALES
Here are a few of the pros and cons of share sale or asset sale:
Share Sale Pros
- A share sale transaction will be much more straightforward than an asset sale if you are selling your company. This is because the company is sold as a 'going concern' in totality.
- For businesses that want to operate as usual post-sale, share sales are the more discreet option.
- When a buyer purchases a company via shares, they will inherit any problems that exist at the date of sale.
- A share sale tends to be more tax-efficient for the seller than the alternative asset sale.
Share Sale Cons
- The buyer's risk appetite increases with a share sale due to the possible level of liabilities the buyer may be exposed to.
- To make up for the higher risk aspect, a seller can be expected to provide extensive warranties and indemnities to offer some protection against unknown liabilities.
- A buyer can apply a discount to reflect the heightened risk.
Asset Sale Pros
- There tend to be fewer risks for the buyer with an asset sale, resulting in a more straightforward contract and transaction.
- The seller will be your company rather than you personally (unless there is a contrary express arrangement). This is also applicable to any warranties or guarantees given to the buyer.
- It is possible to retain certain parts of the business that hold value to you, or you can even choose to sell these other assets to a different buyer at a later date.
Asset Sale Cons
- There tend to be fewer tax benefits for the sellers when choosing the asset option, and it is logistically more complex than a share sale. For example, you will need to ensure all the different parts of the business are legally transferred, including any properties, employees or contracts.
- Some buyers may end up 'cherry-picking' the assets they want to acquire. This can be frustrating for some businesses wanting to sell all their assets for a clean break. You can end up having to find an alternative buyer for the assets which are harder to sell on their own.
- At the end of the transaction, the company will still be yours. This means it will be your responsibility to deal with the matters like paying all existing liabilities and debts and disposing of the retained assets before taking the net cash proceeds.
WHAT TO CONSIDER WHEN SELLING BUSINESS ASSETS
Assuming you have gone with the asset selling option, there is a lot to consider before proceeding with a sale. First off, you will need to identify all assets used in the business. This tends to include a lease of the occupied property, goodwill, equipment, stock and intellectual property rights.
The next step will be to select the assets you are interested in selling and which ones you would like to retain. This is especially significant when a division of a larger business is being sold. In this circumstance, you may want to consider a pre-sale reorganisation by transferring assets into another company within the group.
During the asset selection process, remember that only the assets which are necessary for the smooth running of the business need to be included. This means that you can exclude property as the value is not yet at a level to make a good return. Alternatively, you may have some intellectual property that you want to licence their use to a purchaser to maximise the return on such rights.
Here are the three main issues to consider when selling business assets:
- Depreciation – One of the most important areas to take into consideration when selling business assets is the effect of depreciation. There are a few instances when the asset's value will be subject to a particular level of value depreciation from its purchase price. Paired with the fact that assets are only worth what someone else is willing to pay for them and the effect of natural depreciation of value, the price you are hoping to realise for them can be significantly affected.
- Tax – All limited companies need to pay corporation tax on any profit or chargeable gains made through the sale of business assets. This tax law also applies to any unincorporated associations or foreign companies with a UK branch or office. However, suppose you are a sole trader, in a partnership, or a director of a non-UK resident company, you will need to pay capital gains tax (CGT) on any chargeable gains made from the sale of your business assets instead.
- Chargeable Gain – It can be really complicated to work out the exact amount of chargeable gain that you made from business asset sales. The calculation can involve a precise market value coupled with an allowance for inflation by applying for the HMRC Indexation Allowance. For this reason, it can be worth getting an accountant or financial advisor to assist. You will want to make sure your annual account is correct and that you are paying the right tax amounts to stay compliant.
Before embarking on the process of selling your business assets, remember that planning is everything. If you are looking to sell your business entirely (assets and all), you will want to get your company into the best shape it can be. It will likely involve appointing external advisors for 12 to 24 months to assist you with the preparation needed to sell off your business assets or prepare your detailed exit plan.
Whatever the reason for selling your assets, it is a good idea to know what you have in your books, which ones are imperative to the smooth running of the company and whether there are any you can offload. For example, if you have some equipment that you purchased for a single client project and has not been used again for years, you could sell it and reinvest the money back into a more practical everyday asset. So get your assets in order and consider selling them when the time is right.
FREQUENTLY ASKED QUESTIONS (FAQS)
What is the difference between a share sale and an asset sale? The two most common ways to transfer a business to new ownership is via share sale or asset sale. The core difference between the two is the nature of what the buyer acquires:
1. Share sale – The buyer acquires the shares of the company that owns the trade and assets of the business. As a result, the business can continue running on a business as usual basis. The new owner of the company obtains all assets, liabilities and obligations.
2. Asset sale – The buyer acquires the assets which make up the business. This includes both tangible (property, land, machinery and stock) and intangible (intellectual property and goodwill).
How are assets critical to a business? Assets are essential for all types of businesses as it allows the companies to increase their profits, enhance business values and stay up and running. By creating an accurate description of all asset records, business owners can clearly determine the financial status of their business.
What happens to assets when a business is dissolved? A business permanently closes when dissolved as part of a liquidation process. This means that all company assets and liabilities are needed to be dealt with, and the organisation is struck off the Companies House register. When closing a limited company, the majority of company assets will be sold to recoup as much as possible for the creditors.
What are the common types of assets? The common types of assets include current, non-current, physical, intangible, operating and non-operating. Correctly identifying and classifying the assets into types can help support a company's survival, particularly its solvency and associated risks.
How do I sell my business assets? There are many options out there when it comes to selling your business. A popular choice is to hire a professional auctioneer and hold a public auction. Some prefer to pay a business broker to sell off the assets for a fee. Then there is bankruptcy, in which case the bankruptcy trustee will sell your assets and pay off your creditors with the proceeds.
When should you sell an asset? If you managed to get a good deal on an asset, you might want to consider selling when the investment is at a level you are happy with. The best time to sell a business asset is when the market values it. If the asset is not yet at a worthwhile price, hold on to it until the market recognises its value.