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Share sale or asset sale? How to structure the sale of your brand
Founders of fashion brands choose to sell their businesses for a variety of reasons.
So far, 2018 has been a year of stark contrasts for the industry - with the long announced death of the high street we are seeing both small independent labels and larger corporates struggling to stay afloat whilst others, particularly in the online space, continue to thrive.
So whilst chains such as Jones the Bootmaker and East (brands with decades of pedigree with UK consumers) fall into administration, we saw fast fashion retailer Boohoo announce its sales had almost doubled when it posted its full year results at the end of April – no doubt an attractive prospect for shareholders.
Regardless of circumstances, if you are looking to sell all or part of your business, the first thing you will need to consider is how the transaction should be structured. Are you willing to give up some or all of the shares in your company or would a sale of the assets of the company be a better option? This may not be a straightforward decision and even if one of these options clearly trumps the other for you, potential buyers or investors may have different ideas on how the deal should be structured. This can often lead to pro-longed negotiations with potential buyers or investors before you even reach heads of terms!
There are pros and cons to each approach and while a share sale may be the simpler approach to achieving the clean break / favourable tax treatment you desire, it may prove difficult to find a buyer who is willing to acquire the business “warts and all” for the desired purchase price.
Ultimately, unless you are in administration, whether the transaction is a share or an asset sale will usually form part of the commercial arm-wrestle between you and the buyer. Below are points to consider before entering into those negotiations:
1. Which option is more straightforward?
2. What are you looking to sell/retain?
3. Due diligence and risk apportionment
4. Check which third party consents are required
5. The bank’s position
6. Employee position
7. Tax considerations
There is no “one size fits all” option when it comes to selling a fashion brand and the way forward will vary depending on various factors – the urgency of the sale; the existing ownership structure; the financial position of the business and the nature of its assets and liabilities (for example, who owns the intellectual property in the brand), to name a few.
In the case of a share sale, the shares in the target company will transfer to the buyer. In contrast, an asset sale will require each asset or liability that the buyer wishes to purchase from the seller to be dealt with separately by way of assignment, novation or delivery.
If your company has a long trading history or is susceptible to hidden liabilities, an asset purchase will allow the buyer to cherry-pick the best assets and leave behind the liabilities it does not wish to take on. For example, in early 2017, we saw Boohoo snapping up Nasty Gal’s intellectual property and database and, more recently in February 2018, Boi Trading Company purchasing certain of the assets of Manchester based importer, wholesaler and distributor, Juice Corporation out of administration, including the fashion labels Joe Bloggs and Elizabeth Emanuel, in each case leaving unwanted assets and liabilities behind.
From a seller’s perspective, it is usually more attractive to be able to make a clean break by selling a company as an entire legal entity (with all assets and liabilities intact), rather than being left with a shell company which needs to be wound up/struck off once any residual liabilities have been dealt with.
However, you may not wish to sell all of the assets owned by your company and in such circumstances an asset sale could make sense for both you and the buyer. For example, you may wish to retain certain valuable trade marks, or other assets, which you have developed and which are not essential to the operation of the parts of the business which the buyer is purchasing.
Recently we have seen large High Street brands sell off certain assets in order to allow an injection of cash into the business. Take, for instance, French Connection which in January 2017 considered a series of asset sales (including the sale of its flagship Oxford Street store) in order to free up the cash required to develop other areas of its business (including its licensing).
If an asset sale is agreed, the sale and purchase agreement must be absolutely clear on which assets will be transferring and, just as importantly, which will be excluded from the transaction. If, like Marc Jacobs, you own a namesake brand and you want to use that name to appeal to consumers and investors in another business line following the sale, it will be essential to ensure that the name and any related trademarks are excluded from the sale and there is no ambiguity over the circumstances in which you can use them in the future.
The requirement to transfer each asset or liability individually on an asset sale can result in a larger volume of transaction documents than on a share sale. However, the more tailored approach to due diligence and warranties can lead to significant cost savings for both buyer and seller.
When a deal is structured as a share sale, the buyer takes on all assets and liabilities of the company whether it knows about them or not and as a result it will usually carry out extensive financial and legal due diligence on all areas of the company’s business, with vast quantities of information changing hands. Sometimes a large proportion of the parties’ costs relate to this part of the transaction process. In contrast, on an asset sale, the buyer’s due diligence will usually focus on those assets it has agreed to purchase, with less emphasis on hidden or historic liabilities (save where they relate to those assets or liabilities which the buyer is legally required to acquire, for example, employees).
Similarly on a share sale, the buyer will usually request an extensive suite of legal promises (warranties) relating to all aspects of the company’s business (leaving a potential for ongoing liability stretching years into the future). In contrast, the warranties agreed on an asset purchase will generally be fewer in number and will concentrate on the seller’s title to and (where relevant) the condition and/or suitability of the assets being sold.
Often value will lie in key customer and supplier contracts as well as data bases.
On a share sale, the identity of the party contracting with these third party customers and suppliers will not change. The contracts and data relating to them will remain in the name and within the control of the target company. But, if the buyer is buying the contracts and data as part of an asset purchase, they will need to be transferred, assigned or novated so the buyer is legally entitled to the benefit (and the seller does not remain liable).
If contracts are key to the business being sold, you should consider approaching third parties for their approval, prior to the transfer. If approval cannot be obtained, the buyer is likely to want a price-reduction to reflect the increased risk which the buyer is taking on.
Increasingly, contracts with key customers, suppliers and/or landlords will have an automatic termination clause, including, amongst other things, the ability for those third parties to bring contracts to an end in the event of a change of control of the company (which would be triggered on a share sale). If this is the case, you will need to consider approaching those third parties regardless of whether the transaction proceeds as a share or an asset sale.
If you have outstanding business loans, the likelihood is that the lenders will have taken some form of security over your company’s assets. This may be in the form of a legal charge over the premises or a debenture containing charges over the business and assets of the company.
One of the first things a buyer will do when considering whether to make an offer to purchase the assets of a company is to carry out a search to establish who (if anybody) has registered security over those assets. In most cases, the terms of the security will mean you are not able to sell the assets without obtaining releases, which must come directly from the charge-holders.
It is unusual for a company’s loan facilities to remain in place after a change of control. Usually, a buyer will want any facilities to be repaid in full on completion allowing it to put in place a new facility on terms it has negotiated with its preferred lender. However, there are circumstances where it makes sense for an existing facility to remain in place and if the bank is agreeable to this, it may result in the parties agreeing to a share, rather than an asset purchase (so the identity of the borrower does not change).
It is worth noting that any personal guarantees you have provided in respect of your company’s obligations will not be affected by a share sale. You will need to arrange for any such guarantees to be released on completion or risk being liable for the company’s obligations in the future when you no longer have any control over it.
On the whole, an asset sale will allow a buyer to cherry-pick those parts of the business it wants to take on, leaving any unwanted liabilities behind. However, this is not usually the case when it comes to the employees of the business. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (as updated) ("TUPE") may apply in relation to the sale of assets of a company, if the sale amounts to a transfer of a qualifying business unit. This will be important as TUPE provides, amongst other things, for the contracts of employment to transfer to the buyer without variation; protection for employees against dismissal connected with the transfer and also sets out duties on the buyer to inform, and possibly consult, with the trade unions or elected employee representatives.
On the one hand, this is a benefit for the seller, who does not need to deal with redundancies after a sale has gone through and it no longer requires the services of its employees. However, as the buyer will also take on the risk of any employee claims when employees move across, it will usually look for a price chip, warranty protections or in some cases an indemnity level of cover to reflect such risk.
By contrast, TUPE does not apply to share sales and while the buyer may be taking on the company’s employees, along with its other assets and liabilities, the parties will not have any obligation to inform and consult with employees regarding the sale.
Undoubtedly, near the top of your list of concerns when it comes to a sale will be the return you are likely to make and tax will be directly relevant to this. The structure of a transaction is often heavily driven by tax and you should take detailed advice on the implications of a given structure at the outset.
Capital Gains Tax
The basic position is that capital gains tax will be payable on the gain arising on the sale of both shares and assets. However, there are certain reliefs available in each case and a seller will benefit from taking detailed advice in this area.
In particular, sellers will often be keen to structure the transaction as a share sale in order to benefit from Entrepreneurs Relief, which will generally apply and reduce the tax payable on the gain you make on your shares to 10% where the following criteria are met:
- you are an employee or office holder of the company (or a company in its group);
- the company’s main activities are in trading (or it’s the holding company of a trading group); and
- You have at least 5% of the shares and voting rights in the company.
Whilst there are some circumstances where Entrepreneurs Relief will apply on the disposal of assets, this will not be the case where the seller is a company.
Unless a transfer is intragroup, stamp duty is payable by the buyers on a share transfer at a rate of 0.5%. Generally, stamp duty is not payable on an asset transfer but it the transaction includes the transfer of real property, the parties will need to consider whether stamp duty land tax will be payable.
VAT is not payable on the transfer of shares but may be payable on the transfer of assets if they do not constitute the “transfer of a business as a going concern”.
There is potential for a double tax charge on an asset sale, where your company is taxed on the sale of the assets and then you are taxed on the extraction of the sale proceeds from the company (i.e. by way of a dividend or other form of distribution). Whilst this will not always be the case, the potential for a double charge means asset sales tend to be less tax efficient for sellers.
Regardless of the structure you ultimately choose, it is never too soon to start thinking about your exit.