Manufacturing Acquisitions – Share Purchase Or Asset Purchase?

When acquiring a manufacturing business, it is important to understand the options available to structure the deal.

An acquisition will be structured in two ways: a share purchase or an asset purchase. Both will allow you to acquire the target business, but each has legal, tax and commercial advantages and disadvantages.

In a share purchase, the buyer acquires the shares in the target company, which contains the manufacturing business. As a result, a buyer in a share purchase acquires the business and assets, along with any pre-existing liabilities and obligations.

Advantages 

It can be a smoother transition to acquire a manufacturing business via a share purchase as there is continuity – customers and suppliers continue to deal with the same company as before, only the shareholders have changed.

There is no need to transfer individual assets, plant and machinery, equipment, properties and contracts to the buyer. While a share purchase may trigger a change of control, negotiating new agreements with the business’s suppliers or customers should generally not be necessary.

This is particularly advantageous in a manufacturing context if the target company has favourable commercial terms with established customers or suppliers.

Employees do not need to TUPE transfer across the business, avoiding the need to consult. Likewise, any consents or licences required to operate the business will already be in place.

From a tax perspective, stamp duty on a share purchase is charged at 0.5% of the total purchase price. VAT is also not chargeable. This can be a significantly lower tax burden than tax payable on an asset purchase.

Disadvantages 

In a share purchase, a buyer will inherit all the target company’s liabilities from completion, including all pre-date completion liabilities. Due to this, the buyer will need to conduct a very detailed due diligence exercise, spanning financial and tax, legal and commercial due diligence.

This exercise can be time-consuming and add significant professional costs to the buyer. A lengthy due diligence exercise can also adversely impact the target business as the seller must dedicate time to collating documentation and preparing responses, disrupting the operation of the business and potentially impacting its financial performance.

To protect the buyer, the coverage included within a share purchase agreement is usually more onerous than that included in an asset purchase, including warranties, indemnities, and a tax covenant.

This can lead to complex negotiations and the need to conduct a detailed disclosure exercise for the seller.  

In an asset purchase, the buyer acquires only the target company’s business and assets, not the shares.

The business is therefore not purchased ‘lock, stock, and barrel’; rather, the buyer can be selective about what it does (and, more importantly, does not) wish to acquire. Any unpurchased assets or liabilities will remain under the seller’s ownership.

Advantages 

One of the main advantages of an asset purchase is that it has an element of flexibility compared to a share purchase. A buyer in an asset purchase can select the assets it intends to purchase, for example, plant and equipment, intellectual property, and contracts with commercially attractive suppliers and customers.

Unless a buyer specifically agrees, it will not acquire liabilities of the target business, such as historical issues or breaches, environmental issues, tax or issues that the seller may not have disclosed.

Asset purchase agreements are usually less complex than share purchase agreements. While they will provide a degree of coverage in the form of warranties (and possibly indemnities), the seller’s coverage is often lighter than in a share purchase, reducing the time required to negotiate the documentation.

Disadvantages 

Due to the need to transfer each of the separate assets constituting the business, key assets may be missed. Conversely, if the deal is to acquire all assets other than the items specifically excluded, there is a risk that an unwanted asset or liability is not correctly excluded.

As the business transfers to a buyer, all contracts between the seller and its customers, suppliers and other third parties must be assigned from the seller to the buyer.

Often, a seller can only assign a contract with the consent of the other party. It can be time-consuming to seek such consent, and there is no guarantee that consent will be provided. If this is the case, it will not be possible to transfer, and a buyer will have to decide whether to proceed without the contract or negotiate a new contract with the relevant third party directly.

Asset purchases are often structured with split exchange and completion for this reason, which often requires detailed negotiation of the conditions attached to completion of the deal, on what basis a buyer (or a seller) can terminate the agreement and not proceed to completion and how risk is apportioned in the gap between exchange and completion.

All employees associated with the target business will generally transfer under TUPE. However, it is often necessary to consult with staff in line with the statutory requirements before the transfer.

From a tax perspective, stamp duty land tax will be chargeable on any real property transferred as part of an asset purchase, which can be charged up to 5% of the property value.

VAT may or may not be chargeable on an asset purchase, adding up to 20% to the purchase price if charged. This may depend upon the VAT status of the buyer and the seller, the VAT status of the assets to be purchased, and whether the business is transferred, which is a going concern.

This can be a complex niche area, and specialist tax advice may be required.