I’m buying another agency: should I buy its shares or its assets?
If you’re buying another agency, one of the first questions to settle is what you’re buying.
You might buy the shares in the company that owns the agency. Alternatively, you might buy selected parts of the business, such as its client relationships, brand, intellectual property, equipment and goodwill. Those two structures can produce very different results.
The right approach depends on what you want from the acquisition, what sits inside the target company and the risks you’re prepared to take on. Ideally, you should think about the structure before agreeing the heads of terms, rather than once the deal is already being documented.
What happens if you buy the shares?
In a share purchase, you’re buying shares in the company that operates the agency. The company itself continues to exist. Its assets, contracts and liabilities generally remain with it, but the ownership of the company changes.
From a practical perspective, that can make the business look relatively unchanged from the outside. The same company still employs the team, owns its assets and remains party to its contracts. But there is an important consequence for the buyer: you’re acquiring the company with its history.
That means understanding its existing liabilities and any problems that may have arisen before you became the owner. This is one reason legal due diligence, warranties and appropriate contractual protection are so important on a share purchase.
What happens if you buy the assets?
An asset purchase works differently: instead of buying the company itself, the buyer agrees to acquire specified assets that make up the business.
For an agency, those assets might include its name and brand, intellectual property, website and domains, equipment, certain client contracts and goodwill. The buyer and seller need to identify exactly what is transferring and what is staying behind.
That ability to define the perimeter of the deal can be attractive to a buyer who wants a particular part of an agency rather than the company itself. However, it can also create more work. Individual assets, contracts and other rights may need to be transferred to the buyer, and you need to establish whether that can be done.
Think carefully about the client contracts
For many agencies, the client relationships are a large part of what you’re paying for. On a share purchase, the company that entered into those contracts remains the same legal entity after the transaction.
Even then, don’t assume nothing needs checking. Some contracts contain provisions dealing with a change in control of the company and may require consent, notification or give the client particular rights when ownership changes.
An asset purchase is different because you’re trying to move the benefit of contracts from one legal entity to another. You therefore need to review the contracts and establish what is required to transfer them. Depending on the contract, this may involve obtaining the client’s consent or entering additional documentation.
If a large proportion of the agency’s value comes from three major clients, understanding whether those relationships will successfully move with the business is fundamental to the deal.
Check who owns the intellectual property
The same applies to intellectual property. If you’re buying an agency because of its brand, creative output, software, internal tools or technology, make sure the seller actually has the rights you’re expecting to acquire.
On an asset purchase, the relevant intellectual property needs to be properly identified and transferred as part of the transaction.
On a share purchase, the IP remains within the company you’re acquiring, but you should still investigate ownership as part of due diligence.
For example, important software or branding might have been created by a freelancer or external developer years earlier.
The fact that the target agency has been using something for years doesn’t necessarily answer the question of what rights it owns.
What happens to the employees?
Employees are another important distinction. On a share purchase, the employer itself does not change simply because its shareholders change. The employees therefore generally remain employed by the same company.
With an asset or business purchase, the position can be different. The Transfer of Undertakings (Protection of Employment) Regulations, usually called TUPE, can apply where a business or part of a business transfers to a new employer. Where TUPE applies, employees assigned to the transferring business will usually transfer to the buyer with their employment terms and continuity of employment protected.
This can create important obligations for both sides of the transaction. If you’re buying an agency with employees, don’t leave the employment analysis until the end of the deal. Work out early who is expected to move across and take employment advice on how the proposed transaction affects them.
An asset purchase doesn’t mean you can ignore the seller’s history
A buyer may initially prefer an asset purchase because it appears to offer greater ability to choose what is being acquired. That can be an advantage, but it shouldn’t replace proper due diligence.
You still need to understand the assets you’re buying, whether the seller owns them, whether contracts can be transferred and whether there are liabilities that could affect the business after completion.
There may also be liabilities or obligations that transfer or affect the buyer because of the nature of the transaction or applicable law.
The sale agreement should clearly identify what the buyer is acquiring and the liabilities each party has agreed to assume.
Due diligence matters in both structures
Due diligence isn’t only for share purchases. The focus may be different, but you still need to understand what you’re buying.
In a share purchase, that is likely to involve a broader review of the company and its history because you’re acquiring ownership of the whole company.
In an asset purchase, you may focus more heavily on the particular assets, contracts, employees and liabilities connected with the business being acquired.
For an agency acquisition, I’d expect particular attention to be paid to client contracts, intellectual property, employees and freelancers, disputes, data protection, key software and supplier arrangements and anything that could affect the agency’s ability to continue servicing its clients after completion.
Don’t choose the structure without looking at tax
The legal structure and tax treatment need to be considered together.
A share purchase and an asset purchase can have different tax consequences for the buyer and seller. For example, HMRC treats a company selling its assets differently from shareholders selling their shares, and different taxes or reliefs can potentially apply depending on the structure and circumstances. Tax can therefore have a significant influence on negotiations.
This is an area where I’d involve the parties’ tax advisers early rather than choosing the legal structure first and considering tax afterwards.
Agree the structure before the heads of terms are finalised
If possible, decide whether you’re proposing a share or asset purchase before the main commercial terms are fixed.
Your heads of terms will often cover the purchase price, what is being acquired, payment structure, due diligence, exclusivity and the proposed timetable.
If the parties think they’re agreeing a straightforward purchase of an agency but haven’t established whether that means its shares or its business and assets, there is still a fundamental part of the deal to resolve.
Changing the structure later can affect the documentation, due diligence, tax position and timetable.
It is much easier to address those issues while the deal is still being shaped.
So, should you buy the shares or the assets?
There isn’t one structure that’s automatically better for every agency acquisition.
Start with what you’re trying to achieve.
I’d want a buyer to answer these questions:
1. What do you actually want to acquire? The entire company or particular parts of the agency?
2. Where are the risks? Are there historical liabilities or issues within the company that concern you?
3. How important are the client contracts? Check what happens under each structure.
4. What happens to the team? Understand the employment position and whether TUPE needs to be considered.
5. Who owns the IP? Make sure the rights you’re paying for are actually there.
6. What are the tax consequences? Get tax advice before committing to the structure.
Sometimes those answers point clearly towards one structure. Sometimes there will be advantages and disadvantages to both, and the final position becomes part of the negotiation with the seller.
The important thing is to decide what you’re buying before you agree how much you’re willing to pay for it.
Frequently Asked Questions
What is the difference between a share purchase and an asset purchase?
In a share purchase, you acquire shares in the company operating the business. In an asset purchase, you acquire specified assets and rights rather than the company itself.
Do employees transfer when I buy an agency?
It depends on the structure and circumstances. A share sale does not itself change the employer. On a business or asset transfer, TUPE may apply.
Is an asset purchase always safer for the buyer?
No. It may give you greater control over what you acquire, but contracts and assets need to be transferred, employment issues need considering and due diligence remains important.
This article is for general information purposes only and is not advice on your specific situation, and does not constitute legal advice.
