The forecourt property market is as buoyant as ever, with quality sites snapped up quickly. David Emery, a partner at law firm Winckworth Sherwood, walks us through the main legal considerations for both buyers and sellers thinking of taking the plunge.
Asset versus share sales
If you are considering selling your forecourt business, or indeed buying into one, then, as well as thinking about the where, when, why and, crucially, the price, you should be thinking about how to undertake the sale. There are two primary legal routes for doing so: an asset sale or a share sale. A share sale may seem the most attractive, due to the ability to offer a ‘clean break’ but there are distinct advantages to the asset sale route.
An asset sale involves selling specific assets of the business. The buyer and seller select and negotiate which assets to acquire – such as premises, machinery, pre-existing contracts, and goodwill (the intangible value derived from brand reputation, customer relationships, and employee loyalty). Ownership of the company itself does not transfer; only the acquired assets do.
A clean break?
A share sale typically results in a clean break for the seller subject to the terms of the sale agreement. The buyer assumes all liabilities (subject to the terms of the sale and purchase agreement), and the seller steps away from the business entirely. The ‘target’ company continues to operate under the new ownership, which can minimise disruption.
With an asset sale, however, the buyer cherry-picks which assets and liabilities to take on. This means some liabilities remain with the seller – for instance, the burden of most contracts will remain with the seller unless the consent of the other party is obtained. This is because, under English law, only the benefit of a contract can be assigned (i.e. transferred) without third-party consent. It is worth noting that this may open the door for renegotiation, as third parties (such as fuel suppliers) may use the assignment process to revise their terms. The seller does have leverage to mitigate against this disadvantage, however, as asset sales may attract a greater number of potential buyers, or be more attractive to you as a buyer, if they can avoid taking on the seller’s existing liabilities.
Due diligence
Due diligence, which is the buyer’s investigation into the business, tends to be more extensive in share sales. Since the buyer inherits the entire company, they will scrutinise all aspects of the business in order to identify any potential hidden liabilities. In asset sales, due diligence is narrower, focusing only on the assets being acquired.
This difference can impact both the timeline and legal costs of the transaction, which are important considerations for both parties.
Employees
There is no change of an employer in a share sale – the target company continues to be the employer before and after the sale, and there is no direct effect on the contracts of employment of the workforce. Therefore, a share sale in itself will not generally give rise to any potential claims (although separate actions by the buyer or seller e.g., dismissal of an employee, may result in a claim).
By contrast, asset sales are subject to The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”). Where TUPE applies, the sale of the business does not terminate the employment contracts of employees affected. Instead, the employee’s contracts, along with all rights, powers, duties and liabilities which attach to them, will be transferred to the buyer (whether the buyer wants this to be the case or not). In other words, employees employed by the seller ‘automatically’ become employees of the buyer.
Tax considerations
Share sales generally offer simpler tax treatment, subject to the tax liabilities of the target company being sold. The seller’s shareholders receive the sale proceeds and may be subject to capital gains tax (CGT) (for individuals) or corporation tax (for corporate shareholders). A corporate seller is likely to benefit from the “Substantial Shareholding Exemption”, which exempts gains on disposals (i.e. the sale) of 10% or more of a company’s ordinary share capital. The buyer is also liable to pay (share) Stamp Duty charged at a rate of 0.5% of the purchase price rounded to the nearest £5.
Asset sales are more complex from a tax perspective. The selling company incurs a corporation tax on any gains from the sale of assets. This includes:
- Chargeable gains on capital assets
- Income tax on stock sales
- Balancing charges on assets with previously claimed capital allowances
Shareholders may then face a second layer of tax when extracting sale proceeds – either as dividends (subject to income tax) or via liquidation (subject to CGT). Again, however, corporate shareholders are unlikely to incur a tax charge due to the Substantial Shareholder exemption.
Share stamp duty is generally not payable by the buyer with asset sales, as this is only paid on “dutiable assets” – i.e. shares. Stamp Duty Land Tax (SDLT) may, however, be payable on an acquisition of land, and asset sales can be subject to VAT in instances where the transfer of the business does not constitute a transfer of a business ‘as a going concern’, aka a ‘TOGC’. A sting in the tail is that where ‘TOGC’ relief from VAT does not apply, then SDLT would be chargeable on the value of the land being sold plus any applicable VAT. An asset sale may therefore be less tax advantageous for a buyer where land of significant value is being sold, albeit tax structuring advice would be needed as appropriate and certain offsets available.
Final thoughts
This article is intended to provide a high-level overview of the key legal implications of asset and share sales. There are many other factors which ought to be taken into consideration on the sale of a business – such as tax reliefs, title transfer issues, and regulatory considerations. Each business is different, and each seller will have individual requirements and expectations. It is therefore essential to seek tailored advice from your legal and financial advisors before proceeding with the sale of your forecourt business.
David Emery is a partner specialising in commercial contracts and regulation at Winckworth Sherwood LLP. If you have any questions about this article or would like to discuss the sale of your business, please contact him at demery@wslaw.co.uk
- Neither of Winckworth Sherwood or Forecourt Trader shall be liable for any decision or action taken on the basis of this column. Nothing in this article constitutes legal advice or gives rise to a solicitor/client relationship. Specialist legal advice should be taken in relation to specific circumstances.
