Asset deal vs. share deal

In connection with the sale of companies to third parties, the fundamental question regularly arises as to how the transaction should be structured from a legal and also from a tax perspective. There are two basic concepts to choose from - the "asset" or the "share" deal. In the following, we briefly present the civil and tax law opportunities and challenges of these two variants.

1 The asset deal

The asset deal is the sale of assets between independent third parties and is the preferred form of company sale in the SME sector in Switzerland (especially when selling a sole proprietorship or a partnership). This is because, in the case of sole proprietorships and partnerships, the assets are tied to the owners under civil law and not to the company itself. However, a corporation (AG or GmbH) can also sell only part of its company by means of an asset deal. For this purpose, it has the option of singular succession under the Swiss Code of Obligations or the transfer of assets under the Merger Act.

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1.1 Opportunities

  • The asset deal requires an up-to-date valuation of the assets. In addition, individual assets must be clearly defined if only a partial purchase is desired. This enables the buyer to clearly delimit his financial risk, since he can first obtain a complete and current overview of the financial situation of the object of purchase and has the possibility make a selective takeover of the company. In addition, the asset deal offers the buyer the possibility of offsetting the expenditure for financing the acquisition in a tax-effective manner.
  • Assets purchased at fair value may be recognised by the buyer and amortised as necessary. Goodwill paid can be recognised by the buyer and amortised for tax purposes.
  • Since historical tax risks generally remain with the seller, a detailed and usually time-consuming "due diligence" review is often not necessary from a tax perspective. It should be noted that this "rule of thumb" has only recently been strongly relativised by the Federal Supreme Court with regard to VAT. The Federal Supreme Court, in its decision of 21 February 2020 (2C_923/2018), ruled that already the transfer of a "partial asset" leads to a (partial) tax succession within the meaning of Art. Art. 16 para. 2 VAT Act.

1.2 Challenges

  • The name of a sole proprietorship is linked to a natural person. Therefore, the name cannot be retained in the event of a change of ownership.
  • The existing contracts are also tied to the owner and thus cannot be taken over without further ado. A transfer must be carefully examined and contracts possibly renegotiated.
  • In the case of asset deals, the seller can offset book profits from the sale of the company against previous year's losses from the business unit with tax effect. However, losses carried forward cannot be passed on to the buyer.
  • The seller does not realise a tax-free capital gain. The book profits from the sale of the business are therefore taxable. This can lead to tax consequences in the form of income tax (for natural persons) or profit tax (for legal entities) and is therefore generally higher for the seller in the case of an asset deal than in the case of a share deal. However, tax relief can arise in particular if the seller definitively gives up his entrepreneurial activity.

Since the asset deal is often the better option for the buyer from a tax point of view, there is a conflict of objectives between buyer and seller in most constellations, as shown below.

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2 The Share Deal

For the sale of company shares (shares in an AG or ordinary shares in a GmbH) there is the alternative option of a share deal. In this case, the acquirer can take over the entire company or only a part of it. In practice, the share deal is often preferred to the asset deal because of tax advantages.

2.1 Opportunities

  • The name of the company and the contracts based on it are linked to the legal entity and can therefore be taken over without further ado.
  • Losses carried forward can be offset by the buyer over 7 years.
  • In principle, there are fewer discussions about the acquisition of specific assets, since an entire package (or a share of it) is acquired.
  • With this variant, the seller regularly benefits from a tax-free private capital gain. However, it is particularly important to keep a close eye on objectified tax avoidance situations such as indirect partial liquidation, transposition or the institution of the professional securities trader.

2.2 Challenges

  • All risks of the enterprise are transferred to the buyer, therefore the enterprise must be subjected to a complex and thorough examination before the purchase ("due diligence").
  • Registered shares with restricted transferability or any statutory conditions may require the approval of the Board of Directors in the event of a change of ownership. The control over the company changes only upon entry in the share register.
  • The buyer also assumes any debts of the company with the overall package. As a rule, however, these are deducted from the purchase price by means of a contractual arrangement.
  • In the case of a share deal, the buyer can no longer offset the expenses for financing the sale of the equity interest against the income of the acquired company. Furthermore, the buyer can no longer capitalise the goodwill paid and amortise it for tax purposes. However, this challenge can be mitigated with careful planning. The buyer can, for example, acquire the participation either through an existing company or through a company set up specifically for this purpose. By subsequently absorbing the object of purchase, the costs of financing the sale of the participation of the sale of the participation is transferred to the object of purchase itself. However, such an option must be well thought through and discussed with the tax authorities in advance.

3 Conclusion and further structuring possibilities

Compared to an asset deal, a share deal is less complex due to fewer negotiations and more attractive for the seller, especially from a tax perspective, due to the tax-free capital gain. However, the potential buyer gains a much less profound insight into the financial background of the company, which makes it imperative to carry out a "due diligence" prior to the purchase.

Through a timely tax-neutral conversion of a sole proprietorship or partnership into a corporation and a sale after the expiration of the five-year lock-up period, the seller can realise an attractive share deal.

However, due to the many tax pitfalls, careful planning of the business succession as well as early coordination with the tax authorities is indispensable.

If you have any questions regarding the planning of your company's succession, we will be happy to assist you at any time.