Buying a company: share deal or asset deal, and what to check before you sign

When you buy a business, you can usually buy the company itself (a share deal) or the assets and contracts it uses (an asset deal). Sellers tend to prefer share deals, because their gain on shares is often taxed lightly or exempt. Buyers often gain more from an asset deal. The price should reflect who carries which tax cost, which is why the structure needs deciding before the price is agreed.

Share deal: you inherit the history

In a share deal, the company keeps all its past tax positions, good and bad. Unpaid tax, open enquiries, payroll errors, misclassified contractors and weak transfer pricing all become your problem. The usual protection is tax due diligence followed by warranties and a tax indemnity (in the UK, a tax covenant) from the seller, sometimes supported by an escrow or warranty and indemnity insurance.

The company's tax losses also stay with it, but their value is often limited. Many countries restrict losses after a change of ownership. The UK, for example, can deny carried-forward trading losses if there is a major change in the nature or conduct of the trade within five years of the change in ownership. Germany can forfeit losses when more than half the shares change hands, subject to exceptions. Treat losses as a possible upside to confirm, and avoid paying for them in full.

Asset deal: a fresh start and a step-up

In an asset deal you choose what you take, and the historic liabilities largely stay with the seller. You also acquire the assets at what you paid for them, so the price, including goodwill and intangibles, can often be depreciated or amortised for tax purposes, depending on the country. The costs are practical: contracts need assigning, employees may transfer automatically with their existing terms (in the UK, under TUPE), and transfer taxes and VAT need checking, although many countries relieve VAT on the transfer of a going concern.

Where the buying company should sit

The acquiring entity affects three things over the life of the investment: whether interest on acquisition debt can be deducted against the target's profits (many countries limit net interest deductions, commonly to 30% of tax-adjusted earnings in the EU), whether dividends from the target reach you without withholding tax, and whether a later sale of the target can fall under a participation exemption. Putting a new holding company in the right country, with real management, before signing is far simpler than moving the target afterwards.

Earn-outs from the buyer's side

If part of the price depends on future results, decide how the earn-out is described. Payments linked to the sellers staying on as employees can be treated as pay, with employment taxes and social security for the company to account for. Payments that are genuinely price are treated differently. The drafting decides.

Before you sign

• Commission tax due diligence focused on the risks that matter for this business: payroll, VAT, transfer pricing, contractor status and open enquiries.
• Compare the after-tax cost of a share deal and an asset deal, and use the difference in the price negotiation.
• Value losses cautiously and check the change of ownership rules.
• Set up the acquiring entity, its financing and its board before signing.
• Make sure the tax warranties and indemnity cover what due diligence found, and for long enough.

If you are about to buy a business, call us before you sign the term sheet. The first 30-minute consultation is free, and every request is answered within 24 hours.

General information, not advice. Tax rules change and depend on your facts. Greyridge Global coordinates and delivers cross-border tax and corporate work through appropriately licensed professionals in each jurisdiction. Legal, tax, immigration, fiduciary, and regulated services are provided by qualified advisors engaged for your matter. Nothing on this page is tax or legal advice.