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Share purchase or asset purchase?

Keith Brown, CEO at Wealth Holdings and an expert in the IFA M&A sphere, compares the share purchase and asset purchase models – weighing up the various pros and cons for buyers and sellers of IFA businesses.

In my twenty years or so of working in the IFA mergers and acquisitions (M&A) space, I’ve been on both the buy and sell side of adviser business transactions ranging from tens of thousands to tens of millions of pounds. No two transactions are exactly alike, but there are several constantly recurring themes.

Whenever we discuss with business owners the potential sale or acquisition of an IFA practice, we soon find ourselves addressing the issue of share sale/purchase vs asset sale/purchase. Broadly speaking, acquirers are keen to make asset purchases while vendors favour a share sale. The two most obvious factors at play are the differing tax treatment of these two models and the issue of ongoing liability post-sale/acquisition. But it’s not always a simple binary choice – good vs bad – there are pros and cons to both models.

It’s a somewhat “dry” subject, but we want readers to be armed with a full understanding – from both a buyer’s and seller’s perspective – of the drivers that determine how a deal is structured before they enter the market.

What is a limited company?

A Limited Company is a business which is separate, legally, from its managers (Directors) and owners (Shareholders). It is incorporated at Companies House and is given a company registration number, which gives it the status of being a separate ‘legal entity’, distinct from the people who run it and own it.

It is governed both by the requirements of the Companies Act and its own articles of association and it must make returns of certain information, including annual accounts, to Companies House. This information is held on the public register, which is available free online for anyone to see.

Even if a limited company has only one person involved, who is the sole shareholder and lone director, it’s still a distinct, stand-alone entity, legally separate from that person.

As a limited company is separate from its owners in law, that means it:

  • Can enter into contracts in its own name, including employing staff, buying or leasing premises and buying services
  • Is legally responsible for its own actions, and can sue and be sued
  • Has the legal right to retain money it makes from sales and can keep its profits • Is responsible for paying all its own debts and liabilities
  • The shares or assets of the company can be sold

Once the legal structure of a business has been established, the best legal method of a proposed sale/purchase of any business depends on several factors.

The introduction of Entrepreneurs Relief (now called Business Asset Disposal Relief) makes a share purchase more attractive for a seller as it facilitates capital gains tax at 10% on the first £1million taxable profit where shares have been owned for more than two years.

On the other hand, an asset purchase is much more attractive to a buyer as it is less risky. There are no historic liabilities, and the buyer knows exactly what they are buying!

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