Capittal's view: share deal or asset deal, which suits the seller?

Quick answer

Capittal's view is that selling the shares almost always suits the seller and buying the assets almost always suits the buyer. The difference is not one of form. Selling shares transfers the entire company together with all of its tax, employment and contractual history. Selling only the business leaves that history with you. Whoever chooses the structure is choosing who keeps the company's past. That is why this argument is worth money, and why it belongs in the first offer rather than in the draft contract.

What does selling the shares mean, and what does selling only the business mean?

These are two different things being sold, even if the buyer ends up running the same business.

• Share deal. You sell your shares. The company carries on with the same tax number and simply changes owner. Everything inside comes with it: contracts, employees, licences, assets, debts, guarantees, litigation and any tax years still open to inspection.
• Asset deal, or sale of the business unit. The company remains yours and what you sell is the business: plant, stock, brand, customers, assignable contracts and the employees attached to it. The buyer takes the business and you keep the company.

In a share deal the past travels with the company. In an asset deal the past stays inside your company.

Why does selling shares suit me as the seller?

Because it is the only genuine exit. You sign, you are paid, and you stop owning a company on the same day.

• The history leaves with the company. Open tax years, disputes and old employment files remain inside a company that is no longer yours, subject only to the warranties you have given.
• The money reaches you in a single step. You are paid as a shareholder. There is no need to extract the proceeds from a company afterwards by dividend or liquidation.
• The gain is taxed as a transfer of shares. If you sell as an individual, the gain is the difference between the price and the acquisition cost of the shares, taxed in the savings base of Spanish personal income tax.
• Selling through a holding company brings in article 21 of Spain's Corporate Income Tax Act. That article governs the exemption for income arising on the transfer of shares in subsidiaries where its conditions are met, including a minimum shareholding percentage and a minimum holding period. It is a regime with conditions, not an automatic result.

Why is the buyer asking to buy only the assets?

The buyer is not being difficult. They are trying to buy the business without buying your past.

• They choose what they buy. They take the plant, the brand and the customers they want, and leave out the property or the product line they do not.
• They leave the contingencies behind. They do not inherit open tax years, penalties, litigation or any debt they have not expressly agreed to assume.
• They can depreciate what they buy. The price is allocated across the assets acquired and generates deductible expense. In a share deal, any premium paid above book value gives them no depreciation at all.

Their logic is sound. But the risk they are avoiding is, for you, a risk you are keeping.

What happens to my employees in each case?

In a share sale nothing happens on the employment side. The employer is still the same company, the contracts are untouched and continuous service is unaffected.

In a sale of the business it does happen. Where an autonomous business unit is transferred, the business transfer rules of article 44 of Spain's Workers' Statute apply.

• The buyer steps into the contracts. It takes on the employment contracts with their accrued service and terms, and the previous employer's social security obligations.
• You do not pick the employees. If staff are attached to the unit being transferred, they go with the unit.
• Liability is joint. Transferor and transferee are jointly liable for three years for employment obligations that arose before the transfer and were left unpaid.
• Information duties apply. Both companies must inform the employee representatives of the transfer, its reasons and its consequences.

Hence the paradox: the asset deal is proposed in order to leave the past behind, yet it does not clean up the employment past. It shares it between both parties for three years.

What about the contracts, the licences and the lease on the premises?

In a share deal the legal entity that signed does not change, so the contracts stay in force. The only thing to review is change of control clauses, which let the counterparty terminate if the shareholding changes.

In an asset deal the business has to be rebuilt contract by contract.

• Customers and suppliers. Assignment needs the counterparty's consent. Every consent is an open renegotiation, and every customer will learn about the deal.
• Licences and permits. They are held in the company's name. Some transfer through a simple change of holder, others require the whole application to be started again.
• The lease. Assignment of a lease for use other than housing is governed by article 32 of Spain's Urban Leases Act, which allows it without the landlord's consent unless the lease says otherwise, while entitling the landlord to increase the rent by the percentage the statute itself sets.

That work lengthens the timetable to completion and gives third parties a power of veto they do not have in a share deal.

How is each option taxed for indirect tax purposes?

• Transfer of shares. Article 314 of the consolidated text of Spain's Securities Market Act provides, as a general rule, that transfers of securities are exempt from VAT and from transfer tax and stamp duty.
• The real estate anti-avoidance exception. That same article lifts the exemption where a transfer of securities is used to avoid the tax that would have applied to a transfer of the company's underlying real estate. The transaction is then taxed as a transfer of that property. If your company holds significant real estate, this rule is analysed before anything is structured.
• Transfer of a branch of activity. The transfer of a set of assets making up an autonomous economic unit capable of carrying on the activity by its own means falls outside the scope of VAT. If what is sold is a collection of assets without that autonomy, each asset is taxed under its own rules.

What am I left with if I sell only the business?

An empty company with cash inside it, which is not the same as having the money.

• The price is received by the company, not by you. The company is taxed on the gain in its corporate income tax return.
• Getting the money out is a second step with its own cost. By dividend or by liquidation, there is a second layer of tax in your personal income tax. The headline offer is the same, what reaches your account is not.
• You keep whatever nobody wanted. Debts not assumed, personal guarantees still live, litigation, open tax years and any employees not attached to the unit sold.
• Closing the company costs time and money. Dissolution, liquidation, final balance sheet, cancellation at the Commercial Registry and deregistration with the tax and social security authorities, while keeping the company alive for as long as liability periods run.

The practical rule: if the buyer only wants the business, the price has to compensate for the double layer of tax and the cost of closing the company.

How is this argument settled in practice?

With a share deal, but with protection for the buyer. The buyer will not take the company blind, it takes the company alongside warranties.

• Warranties. You state the condition of the company and answer for it if something was not as described, within agreed limits: an overall cap, a minimum threshold and time limits by subject matter, longer for tax and employment.
• Price retention. Part of the consideration sits in an escrow account for the warranty period.
• Warranty and indemnity insurance. An insurer takes the claim instead of the seller. It lets you be paid clean and release the escrow, and it is common where a fund is the buyer.

The asset deal still has its place: loss-making businesses, business units in insolvency proceedings, contingencies no insurer will cover, or the sale of a single product line. Outside those cases, accepting an asset deal without adjusting the price is giving value away.

This is general market information and not individual tax or legal advice. The right answer depends on your balance sheet, your ownership structure and your personal circumstances, and your own adviser has to review it before you sign.

What is the next step if the buyer wants only the business?

Ask for the indicative offer to state expressly what is being bought: shares or assets. If it says assets, do not argue about the form, argue about the price. Work out three numbers before you reply: the tax on the gain inside the company, the cost of moving that money out to you afterwards, and the cost of winding the company up. The total is the discount an asset deal applies to you in practice.

At Capittal Transacciones we define the structure of the transaction at the same time as the valuation, before the buyer sets it for you. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The partner handles each mandate directly, including the conversation about whether selling the shares or selling the business suits you.

Keep reading

• Guide: every decision you face when selling your company
• Selling just one business line or subsidiary
• Sell the property with the business or separate it first

Pick the structure that costs you least: talk to Capittal