While share transactions are a common method of business acquisition, they are not the only route to acquiring a business’ trade or operations.
Trade and asset deals are another form of acquisition structure and they can be an excellent way for a buyer expand into new markets, scale up operations or acquire new expertise, all while taking on a lower level of risk.
However, they aren’t the right approach for every transaction. Here’s the basics for considering whether a trade and asset deal might be right for you.
Asset deals
In a trade and asset deal, the buyer acquires a bundle of assets and rights – sometimes assuming responsibility for certain liabilities – relating to the target trade and the specific assets used for the benefit of that trade.
The assets acquired could range from customer contracts or order books, stock, fixed assets supporting operations, land and buildings, or even employee contracts.
This differs from share transactions, which involve acquiring the shares and control over legal entities, and thereby allthe assets, liabilities and legal obligations and implications associated with the legal entity in which the shares are held.
What are the advantages of an asset deal?
For the buyer, a trade and asset deal can offer several advantages over a share transaction as it can extract the benefits whilst minimising risk.
The main advantage of a trade and asset deal is that you can choose which assets and liabilities of a business you want to acquire.
In a share acquisition, the default position is that all liabilities of the legal entity are taken on by the buyer, subject to ancillary agreements, warranties and indemnities. Therefore, a trade and asset deal can be a less risky, more tailored investment. Often buyers are nervous of inadvertently inheriting liabilities that are not identified during the acquisition process. Such liabilities and obligations can have a significant impact on value in a share acquisition. An appropriately structured trade and asset acquisition can avoid this.
Because of the lower risk, diligence required in trade asset deals is often lighter touch than in share purchases. Trade and asset deals tend to be simpler than share purchases, so can usually be completed in less time at cheaper cost.
From a seller’s perspective, trade and asset deals might be more appropriate if they are looking to quickly exit a particular part of their business but have other operations that will continue.
What are the disadvantages of an asset deal?
Certain contracts may be disrupted during a trade and asset purchase, such as where third-party consents are required, or the transfer triggering a renegotiation of terms. Furthermore, there needs to be precise identification of the trade and assets which will transfer. Omitting a key contract which is essential to operations could have serious consequences for the buyer.
There is likely to be a transitional period when certain processes supporting the transferred assets continue to be provided by the selling entity, usually dealt with via a Transitional Services Agreement (TSA). While the concept is well understood by legal advisors, there are often additional operational processes that need to be put in place, such as ensuring data security for transferred assets.
Both parties must also remain aware of the obligations under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’). This might mean that there is an unintentional transfer of employees with the assets, impacting the ongoing operations and costs of both buyer and seller.
Trade and asset deals may not be attractive to sellers from a tax perspective as they may not be able to take advantage of Business Asset Disposal Relief.
What is an Asset Purchase Agreement?
Asset Purchase Agreements (APAs) set out the terms and conditions relating to the trade and assets being purchased and are used to complete deal transactions.
A well drafted APA will precisely outline which assets will be purchased. It will also cover other specifics such as warranties, timelines, and payment structure representations.
The assets and their purchase price will be unique, so every APA should be carefully tailored to the individual circumstances of the transaction.
APAs are legally binding, so it is important to negotiate the right terms and conditions at the start. You will need to instruct a solicitor to prepare an agreement that is legally sound and appropriately identifies the assets being acquired.
Taxation
With any transaction, detailed tax planning will need to be undertaken to ensure that the structure is as efficient as possible and considers the tax implications and costs associated with extracting proceeds of sale.
Depending upon specific circumstances, a trade and asset sale may often result in a higher tax cost for the seller, if, for example, they are unable to access Business Asset Disposal Relief, which may have been available to them had the transfers been undertaken as a share sale.
With trade and asset deals further consideration needs to be made to ensure VAT compliance is maintained, particularly relating to property, and obtaining robust VAT advice prior to an acquisition is a necessity.
It is worth noting that Stamp Duty applies to the acquisition of shares and not operating assets, so asset purchases are often free from this. Again, consideration needs to be given to Stamp Duty Land Tax if the purchase includes property.
Seeking tax advice early in the process is recommended by both parties to ensure they achieve their intended outcomes.
How we can help
When considering the structuring of a business sale or acquisition, it is important to take specialist professional Corporate Finance advice when negotiating the terms of a transaction to ensure what is being agreed is right for you.
At Harbourside Corporate Finance, we specialise in advising and supporting business owners across the South West and beyond.
We can help you explore your options and advise on whether a trade and asset deal or share sale is right for you.
For tailored advice and guidance on asset deals, contact our expert team