In this article, Kim McNaughton explains the key differences between a share sale and an asset sale method.
As we all know, it has been possible for dental practices in Scotland to be owned and operated by a dental body corporate (DBC) since 2010. As such, we are now starting to see an increasing amount of DBCs looking to sell their dental practice and a question that we are asked on a regular basis is whether they should structure their sale as a share sale or an asset sale.
When a DBC is involved, it is important for both buyers and sellers to have a thorough understanding of the differences between a share and an asset sale, so they can make informed and practical choices.
What’s the difference?
In general, most buyers will want to proceed by way of asset sale and this is what we tend to recommend to our clients. The reason for this lies in the nature of what the buyer actually acquires.
Share purchase: the buyer purchases the shares in the DBC that owns the trade and assets of the dental practice. As such, the buyer is purchasing the DBC itself, which includes all assets, liabilities and obligations of the DBC. Once the transaction is complete, the buyer assumes responsibility for the whole company and the practice continues to be owned and operated by the same DBC.
Asset purchase: the buyer simply acquires the practice assets from the DBC. This may include both tangible assets and intangible assets. The buyer does not acquire the DBC itself. In most cases, the buyer has no ongoing connection with the DBC at all.
How does this affect the sale?
Whether a DBC chooses to proceed by way of share sale or asset sale will have an impact on a number of areas of the sale process:
- Due diligence: in a share sale, the DBC is acquired by the buyer in its present financial state and with all existing liabilities. As such, it involves a greater risk for the buyer than an asset sale does. The due diligence process that a buyer’s solicitor will undertake in connection with a share sale is therefore far more extensive and thorough. This will have an impact on both solicitors’ fees and accountancy fees
- Liabilities: in a share sale, the buyer purchases the DBC ‘warts and all’ and so will inherit any problems or issues that exist at the date of completion. Conversely, in an asset sale, with very few exceptions, all liabilities are left behind in the DBC
- Legal documents: as a share sale involves a greater degree of risk for a buyer, the legal contract and ancillary documents required are more complex than for an asset sale. The buyer will expect the seller of the shares in the DBC to give extensive warranties and guarantees on a number of issues and a more thorough disclosure exercise will require to be undertaken. Again, this will impact on a seller’s legal and accountancy costs
- Tax: depending on the price being paid, a share sale can be more tax efficient for the selling shareholders. In most sales, the selling shareholders of a DBC benefit from a Capital Gains Tax rate of 10%. By contrast, if a DBC sells its goodwill and assets, it will incur a tax liability on the gain achieved. If the shareholder then extracts the cash from the DBC, they will incur a further tax liability, which may make the overall deal less tax efficient
- Price: the price in an asset sale is normally simply the value of the goodwill, assets and property as agreed. However, in a share sale, the price will be very different as it will need to take into account the financial position of the DBC.
Fail to prepare, prepare to fail
We cannot stress enough the importance of planning when it comes to a sale. Before embarking on a sale process therefore, a DBC should:
- Get the practice in the best possible shape it can be. Ensure that the key paperwork is all in place and to hand, and all items of equipment have been serviced and hold a valid certificate
- Get your professional team in place. A dental practice is not like any other business and it is important that your professional team understand and appreciate these in order to make the sale process as efficient as possible. This is why we always suggest using a solicitor who has a proven and solid track record in the dental sector
- Decide how best to structure your sale. After you have appointed your team, it would be worth having an in-depth discussion with both your accountant and your solicitor as to the pros and cons of each structure, so that you can identify the most appropriate way forward.