Share purchase versus asset purchase, and why your lender cares

Two ways to buy the same business

Two buyers can pay an identical price for an identical business and end up owning quite different things, because the legal mechanism of the purchase decides what changes hands.

In a share purchase you buy the company. You take the shares from the current shareholders and step into ownership of the legal entity, with everything it owns and everything it owes. Its contracts, its employees, its trading history, its tax position and any claim that has not surfaced yet all come with it. Nothing about the company changes except who holds the shares.

In an asset purchase you buy selected things out of the company rather than the company itself. Typically the goodwill, the customer relationships, the equipment, the trading name and whatever intellectual property matters. The liabilities you take on are the ones you agree to take on. The legal entity stays with the seller, along with anything you did not buy.

Neither is better in the abstract. The right structure depends on what the business is made of, what the buyer is willing to inherit, and what the seller will accept, which is usually the part that decides it. What is not optional is deciding early, because the choice runs through the funding, the due diligence, the legal cost and the timetable.

What actually transfers, and what stays behind

The practical differences concentrate in five places.

Liabilities. A share purchase takes the company's full history. Unpaid tax, an employment claim nobody mentioned, a warranty dispute with an old customer, a regulatory issue that has not yet been raised: all of it stays attached to the entity you have just bought. Warranties and indemnities in the sale agreement are the protection, and they are only worth what the seller can actually pay if you call on them. An asset purchase leaves those behind by default.
Contracts. A share purchase keeps contracts intact, because the contracting party has not changed. An asset purchase usually means each contract has to be novated, which means the counterparty has to agree. For a maintenance business with hundreds of live agreements that is a serious administrative exercise, and it hands every customer an invitation to renegotiate terms at exactly the moment they know you have just committed.
Change of control clauses. A share purchase is not automatically clean either. Many commercial contracts, most leases and a good number of supplier and franchise agreements contain a clause that is triggered by a change in ownership. Somebody has to read them all before completion, not after.
Employees. In a share purchase the staff never change employer, because the employer is the company. In an asset purchase the rules known as TUPE will usually transfer them automatically anyway, on their existing terms and with their continuous service intact. The difference is in the consultation obligations, the timetable and the handling of anyone who is not transferring.
Tax and duty. The treatment differs substantially on both sides, which is why sellers and buyers so often want opposite structures. Stamp duty on a share transfer, the availability of capital allowances on assets acquired, how goodwill is treated, the seller's capital gains position: none of these are details, and all of them belong with your own accountant and your solicitor rather than being settled across a table.

Why the lender cares, and what changes in the security

A lender is not asking which structure is more elegant. It is asking what it would be lending against, what it could take hold of if the deal went wrong, and who else would be in the queue.

In a share purchase, the security package normally runs through the company. A debenture over the trading entity gives fixed charges over identifiable assets and a floating charge over the rest, and there is usually a charge over the shares themselves so the lender can take control of the business rather than break it up. If the target owns property, that carries its own legal charge. All of this is familiar territory for an acquisition lender and it is well trodden.

In an asset purchase, the assets arrive in a buying vehicle that has no trading history. That can be simpler, because the lender is taking security over things it can identify and value rather than over a company with an unknown past. It can also be harder, because a newly incorporated company with no accounts and no track record is a thinner covenant, and the lender leans more heavily on the buyer personally and on the quality of what has been bought.

The other half of it is diligence. A share purchase means the lender is funding the acquisition of a legal entity with a history, so it wants that history examined properly and will usually want to see the results before it commits. That is real time and real cost, and it belongs in the timetable from the start. What that process covers is set out in due diligence.

How the structure changes what you can borrow

Where the business owns tangible assets of real value, an asset purchase can open a route that a share purchase makes clumsier. Vehicles, plant, machinery and equipment bought directly can often carry funding of their own through asset finance, and a debtor book can support invoice finance or a wider asset-based lending facility. Each of those reduces what the main loan has to cover.

Where the value is in relationships, contracts and recurring income rather than in things, that route is not available in either structure, and senior term debt against cash flow is doing nearly all the work. In that case the choice of structure changes the risk profile and the diligence, not the borrowing capacity.

One thing that is consistent across both: the lender rebuilds the profit figure before it decides anything. It takes the target's earnings, strips out what will not repeat, removes the seller's own drawings and puts back a realistic salary for whoever will do that job after completion. The debt is sized against what is left. Structure does not move that number, which is why a price agreed without reference to it causes the same problem either way.

Worked exampleTake a business with equipment worth 200,000 on the balance sheet and earnings that support borrowing of 400,000. Bought as a share purchase, the whole 400,000 has to come from a single cash-flow facility. Bought as an asset purchase, part of the equipment value might be funded separately, leaving a smaller main loan and a lighter monthly repayment on it. The figures here are invented to show the shape of the argument, not taken from any deal.

Which structure tends to suit which purchase

In accountancy practice purchases a smaller fee block is very often bought as assets: the client list, the goodwill and the right to the trading name, with work in progress and debtors dealt with separately. It is clean, it avoids inheriting a company nobody wants, and the thing being bought and the thing being measured for a clawback are the same thing.

In trade services, where the business holds accreditations, long contracts and a customer base built over decades, the calculation often runs the other way. Buying the company keeps the contracts, the trading history and the approvals in place. Losing an accreditation because it sat with an entity you did not buy is an expensive way to learn the difference, and it is a live risk in fire and security and in electrical and M&E, where the certification is a large part of what makes the business worth buying.

A management team buying the business they already run almost always buys the shares, because continuity is the whole point and the team already knows what is inside the company. That is covered in MBO, MBI and BIMBO explained.

The seller's side, and where the negotiation actually is

Sellers usually prefer a share sale. It is a clean exit: the entity goes, the liabilities go with it, and the tax treatment is often better for them. Buyers usually prefer an asset purchase, for exactly the reasons that make it worse for the seller.

That tension is normal and it is where a good part of the negotiation sits. It is rarely resolved by argument. It is resolved by pricing: a seller who is being asked to accept a structure they do not want will want something back for it, and a buyer taking on unknown history will want that reflected in the price, in the warranties, or in how much of the money is deferred. How that deferral is shaped is covered in deferred consideration and earn-outs.

What goes wrong

The structure changes late. A deal negotiated for months as a share purchase and flipped to an asset purchase three weeks before completion is a new deal. The legal drafting restarts, the lender re-runs its credit process, and the timetable everyone agreed becomes fiction.

Nobody checked what has to novate. Contracts, leases, software licences, accreditations and supplier agreements do not all move automatically in an asset purchase, and the ones that matter most are usually the ones with the most awkward consent clause.

The warranties are unsupported. In a share purchase the warranties are the buyer's protection against the company's past. A warranty from a seller who has spent the proceeds and moved abroad is a piece of paper. Retention, escrow or deferred consideration is what gives it teeth.

The buying vehicle is an afterthought. Which entity buys, whether it is a new company, whether it has any substance and how it is capitalised all affect the security package and the lender's view. It is worth settling before the heads of terms rather than during the legal process.

Both sides assume the other structure is a formality. It is not a formality. It is the difference between inheriting a business and inheriting a business plus everything anyone might one day say about it.

What a lender will want to see

Which structure has been agreed, in the heads of terms, in writing.
Three years of accounts for the target plus current management figures, whichever structure is used.
In a share purchase, the diligence scope and who is doing it, and the warranty and indemnity position.
In an asset purchase, a full schedule of what is being bought and what is being left behind, with values.
The contracts, leases and accreditations that need consent or novation, and the plan for getting it.
Which entity is buying, who owns it, and where the buyer's own contribution is coming from.

The general version of that list, in the order a lender tends to ask for it, is our document checklist. Terms that appear in a sale agreement and nowhere else are in the glossary.

None of this is legal or tax advice, and none of it replaces your solicitor or your own accountant. It is a description of what lenders look at and why.

Getting the structure in front of someone who reads it properly

The same purchase, structured two ways, produces two different answers from the same lender, and different answers again from a lender that has never funded your sector before. That second gap is the expensive one, because the lender learning what your business is worth is doing it at your cost.

What we have is the part that is hard to buy: we know this market, and we know specific people who have funded both structures in these sectors and would look at another one.

So you tell us what you are buying and how the deal is put together. We go to the lenders and brokers who fund that shape rather than to whoever is nearest, and we come back to you with who can fund it and what they will want to see.

We introduce buyers who are acquiring through a limited company or a NewCo. If you are buying personally, as a sole trader or as a partnership, we will point you to an authorised firm directly instead.