Buying or Selling of Business

My 3 Points to Focus on for a solid game plan

Akhil Mishra
February 07, 2024

Business acquisitions are very common.

People do it for various reasons - expanding market reach, diving into new products, cost savings, you name it.

Now, there are several ways to buy or sell a business.

And the structure of the transaction determines the benefits accruing to the sellers and the risks taken on by the buyers.

Mainly two ways are used:

a) Share Sale:

When the transaction is structured as a share sale, the shareholders of the target sell their shares to the purchaser.

b) Asset Sale:

The purchaser only wants to purchase certain assets of the target.

This could include property, machinery, stock, patents and trademarks, and other intangible or tangible assets.

Now you know how the sale and purchase are done.

But it's still not that simple.

There are 3 points to consider.

For a share sale, you’re looking at a “Share Purchase/Transfer Agreement.”

If new shares are being issued, there’s also a “Share Subscription Agreement” in play.

And this is besides the secretarial compliances.

On the Asset Sale side, it's an “Asset Sale and Purchase Agreement.”

This agreement specifies the individual assets to be sold are executed - machinery and such.

The Asset Sale Method has certain tax disadvantages over share sales.

In the case of a Share Sale, the consideration is received directly by the shareholders.

Whereas in a sale of business assets, the consideration is first received by the company.

And THEN, if distributed to the shareholders, results in two levels of tax.

These are capital gains tax in the hands of the seller company, which is difficult to ascertain for each asset.

And subsequently, dividend distribution tax, wherever applicable, is in the hands of shareholders at the time of profit or dividend distribution.

In Share Sale, the Purchaser acquires the complete business “as it is” with all assets and liabilities.

Now this is subject to certain pre or post-conditions agreed.

However, there could be cases where the liabilities were contingent in nature or difficult to determine in due diligence.

This poses a risk for the purchaser and hence, a share sale should always require heavy due diligence to identify any red flags.

That's it.

There is a lot to think about while purchasing or selling a business or a part of it.

Depending on the goal of the Purchaser, a transaction could be structured in a number of different ways.

And each may have its own benefits and drawbacks.

But one thing is clear - due diligence and contract execution are required.

P.S. Are you looking to purchase or sell a business?

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