Share Sale – An Exit Strategy

If you’re planning to exit your business and want to sell your company to a third party, you should consider a share sale.

What is a share sale?

In a share sale, the selling shareholder(s) disposes of most or all of their shares in the company. As a result, the buyer of those shares will acquire the company “as is”  including all assets, liabilities and obligations (present or historic) of the target company (although, the buyer and seller can negotiate protective terms within the share purchase agreement).

What is the process of a share sale?

1. Plan for a share disposal. Within this planning stage, parties will be looking at heads of terms, confidentiality agreements and exclusive dealing arrangements.
2. Due diligence. The buyer will begin to investigate and analyse a wide-range of aspects in relation to the target company. The areas the buyer will investigate will depend on the nature and business of the company but to name a few examples, buyers will want to understand company financial and operational performance, details of third-party contracts, and employee contracts with a view to understanding the company’s strengths and potential issues, which can impact on whether the buyer wants to progress with the transaction or seek to renegotiate the price.
3. Drafting and agreeing the transaction documents. Amongst other documents, this stage includes negotiating and preparing the Share Purchase Agreement (SPA). The SPA will denote the terms and conditions of the sale and contain warranties and other assurances for the benefit of the buyer.
4. Third party consents. Due diligence can reveal what third party consents are required to progress with the transaction successfully. Each sale will differ but examples include, board and shareholder approval, lender approval, approval required under statute.
5. Exchange and completion. At exchange, each party shall sign the necessary transaction documents which brings into fruition a legally binding agreement. On completion, each party shall conclude the transaction by conducting the necessary steps (like handing over stock transfer forms, the buyer paying the purchase price etc). Exchange and completion can be simultaneous or split, depending on the requirements of the parties.
6. Post-completion formalities. By way of example, post-completion tasks include (but are not limited to) filing documents with Companies House, forming a completion bible, paying stamp duty on the share transfers and updating company registers.

Why should you consider a share sale?

Unlike an asset sale, only one key element of the company changes: the ownership. The seller, therefore, will have a clean break from the company, and business operations will continue as usual. Selling a company also means leaving behind the responsibility of ensuring the company complies with all its debts, liabilities and obligations. As it is only the shares which changes hands, from a legal perspective, the sale is quite straight-forward.  In an asset sale, the sellers still retain the “shell” of the company and therefore have to wind up the company. It is also less attractive from a tax perspective for a seller to extract the value of the asset out of the company to the ultimate owners of the company.

Deciding to exit a company can be a difficult choice, however, this decision will be made easier when knowing the incoming buyer possesses the expertise and experience to drive the company forward, steering the business into a prosperous and competitive path. Gaining a new credible owner can be highly attractive to outside investors and can enhance the overall reputation of the company.

Any pitfalls to a share sale?

A sensible buyer will conduct thorough due diligence to ascertain a comprehensive picture of the company they are acquiring. The buyer will want to truly understand (amongst other things) the debts, liabilities and obligations they are inheriting, and as such, will want to thoroughly investigate the company. This therefore means that the due diligence stage of the share sale can be complex and lengthy, requiring the seller to give a wealth of information.

Having conducted its due diligence, the buyer will most likely require warranties and indemnities from the seller (that can go beyond the standard warranties and indemnities given within a SPA). Providing a warranty that is either false or misleading may allow the buyer to pursue a contractual breach of warranty claim against a seller to recover any losses incurred as a result of that breach.

What are the tax requirements?

A common worry when looking to exit a business, is the consequential tax issues that arise. Sellers will most likely pay capital gains tax (CGT) on share disposals, and if within the higher tax bracket, will be charged at 24%. However, Business Asset Disposal Relief (BADR) offers a relief on CGT. BADR will be available for up to a maximum of £1 million of capital gains across any one individual’s lifetime. If a disposal is made on or after 6 April 2025, CGT will be charged at a rate of 14%, or if made on or after 6 April 2026, CGT will be charged at 18%.

Nevertheless, calculating the exact tax payable is a complicated process, and separate tax advice should always be sought.

If you’re looking to exit your business by way of a share sale or by any other means, feel free to reach out to our corporate team.