Share sale or business sale? How the price works

January 2026
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Headlines can be misleading – 13ish reasons why a headline sale price might not reflect the size of the deal

This is the seventh Guide in my series about the differences between share sales and business (asset) sales. You should ideally be aware of these if you are a business owner who might ever want to sell (or buy) a business (or a company…).

The previous Guide explained some of the problems that come with trying to transfer your business contracts, and gave some guidance on how they need to be dealt with in a business sale as opposed to a share sale.

This Guide explains some of the differences between how the purchase price is calculated and set out in share sale contracts and business sale contracts.

I have acted on quite a few company and business sales in the last ahem 30 something years. None of them have been that enormous – I have mainly dealt with small to medium owner-managed businesses, and my average deal size since I went out on this OnHand foray of my own over 15 years ago is but a fraction of many of the deals in my City and regional law firm days – but in some of the largest deals I have ever been involved with the actual price was not much more than £1. Particular ones that come to mind were buying an aerospace engineering business and buying an outside broadcast services business, each of which kept me busy for months and resulted in £100,000+ legal bills.

So how can the headline sale price of a share sale or business sale deal be so different from the size of the business and the overall sale deal? And more pertinently to the theme of this share sale v asset sale series of Guides, why might the headline price on a sale of a company be so different to the price on a sale of that company’s assets? Well, without diving into too much detail on different valuation methodologies that a buyer might use when coming up with a purchase offer price (eg combinations of asset values and enterprise values) here are some reasons:

Assets.

On a share sale, unless you remove assets from the company beforehand (which is usually not good for tax), the company sold will come with all its assets. So the agreed value of all those assets will be built into the price. Whereas with a business sale, the buyer is only paying for whatever assets it has agreed to buy, and the selling company is keeping all the rest. Here are some of the assets that might not be included in a business sale:

a. Cash.

Some companies are cash rich and have built up a reserve of cash beyond what they need to manage their working capital cycle.
In a share sale, all the cash in the company will usually stay in the company, as it is not tax-effective for the shareholders to take it out beforehand as a dividend. As a rule, the buyer will then be happy to increase the basic price it has agreed to pay for the company by an amount equal to any excess cash, and arrangements are then made and documented for this cash to be extracted from the company and paid to the sellers on completion.

Compare this with an asset sale, where any cash will be excluded from the sale and will stay in the selling company.

So if for example a company has £1m surplus cash, that’s a £1m price difference right there between a share sale and a business sale.

b. Debtors

In most business sales the seller company will keep ownership of its book debts. So these will not be included in the headline price on a business sale, whereas they will be taken into account in the pricing on a share sale (although see below about working capital-based adjustments).

c. Unnecessary yachts and things

Sometimes business owners use their businesses for non-core enterprises. For example one current client has somehow acquired a large collection of classic guitars in his food technology company. If his company sells its business it can just exclude these from the sale so they won’t be reflected in the price. But if he sells his shares (as is usually the preference for any shareholders, mainly for tax reasons) then unless he can afford to buy these superfluous assets for their proper value beforehand he may need to add their value to the price and then buy them back from the company out of the share sale proceeds.

Liabilities

a. Long-term liabilities

If a company has a long-term bank loan, the buyer won’t want to take this on. If it’s a business sale it won’t have to – the loan will stay with the seller company. If it’s a share sale then unless the company can afford to pay it off before completion it will stay with the company and the buyer will of course want to reduce the headline price accordingly.

b. Tax

A buyer won’t want to take on a company’s tax liabilities (unless the company comes with allocated cash reserves to meet them, in which case this will be built into the pricing). Again, if it’s a business sale it won’t have to – the liability will stay with the seller company. If it’s a share sale then the amount of the tax liability will be taken into account in determining the price (ie the headline price will generally be reduced accordingly).

c. Short-term liabilities

Things like bank overdrafts. Again, in a business sale the seller company will keep these on, so they won’t be part of the deal, whereas in a share sale they will be reflected in the agreed price.

d. Trade and other creditors

Likewise, the obligation to pay trade creditors will almost always be kept by the seller company on a business sale (unless the buyer has good business reasons for wanting to take some of these on, such as wanting to be in control of keeping key suppliers or licensors happy). If the buyer does agree to take over these liabilities this will need to be carefully dealt with in the sale agreement. As the seller company is the actual party to the relevant contract it will remain primarily liable to the creditor so will need appropriate indemnities from the buyer accompanying the buyer’s promises to pay the liability to the creditor (unless appropriate novation agreements can be put in place where the creditor directly releases the seller company from the liability and agrees for the buyer to directly take over the contract and specified existing liabilities). So as a rule it doesn’t directly affect the headline price.

On a share sale the buyer gets the target company with all its baggage including creditors. So this will be reflected in the price.

e. Unprofitable contracts

In a business sale the parties can agree whether or not to exclude any particular contracts from the sale (see my previous Guide on this).

In a share sale the company will generally come with all the benefits and risks and liabilities associated with all its business contracts.

If there is a known unprofitable contract, the headline price in a business or a share sale agreement may be affected by how the parties have agreed to deal with it in the sale agreement.

So for example, if a buyer’s due diligence throws up any loss-making contracts, in a share sale the buyer might drop the enterprise value element of the purchase price by an appropriate amount (eg a multiple of the projected annual loss); or it might insist on appropriate indemnities in the sale agreement against the risk of certain anticipated liabilities arising.

f. Guarantees

The target company may have given guarantees to lenders or others, guaranteeing the obligations of third parties such as other companies in its group. Likewise other group companies may have given guarantees to lenders of the target company’s liabilities. Either way, the relevant companies remain on the hook regardless of whether there is a share sale or a business sale.

On a business sale this may be less of an issue, if the company has not given any supporting security to the lender (such as a debenture over the company’s assets). In this case a buyer may (subject to concerns about complying with banking covenants) just be able to buy the company’s assets without taking over any of the company’s guarantee obligations. But if the lender does have security then the parties will need to address this as the company won’t be able to sell its assets unless the lender releases them to be sold.

One way or another, arrangements usually need to be put in place either to get releases of all guarantees or to settle the relevant liability. These arrangements can have a big effect on the structure of the deal and the possible headline price.

g. The £1 sale for a large business.

So you can easily see how a large group of companies might have a subsidiary with a good asset base and a decent business which may be attractive to a buyer, but with such a large volume of long-term debt and tax liabilities that it might end up being sold for next to nothing to a buyer which is prepared to take on liabilities which might otherwise stay in the group.

Completion accounts-based adjustments

On most deals a buyer wants to know that after completion the acquired business can carry on smoothly as before without the buyer needing to put in a further injection of funds. It also wants to know that various assumptions and expectations it has as to the state of the company’s finances are going to be correct.

So, the agreement may have a headline price as to how much is paid on completion, but may then provide for a new set of accounts to be produced based on the completion date and for an adjustment to the headline price (whether up or down) to be paid as soon as these are finalised.

So, for example, on a share sale the agreement might have detailed provisions as to what the expected figures should be for working capital-related things such as cash, stock, receivables (debtors), work-in-progress, short term bank liabilities, trade or other creditors and what the price adjustment should be if these figures prove to be different in the completion accounts. The same can apply for other adjustments such as related to the expected as against actual amounts of any long-term liabilities.

These provisions are somewhat less common (and less complex) in a business sale (which is less accounts-driven and where component parts such as cash, debtors and creditors and other liabilities are not part of the deal). It is common for both types of agreement to require some form of stock take at completion which could result in some post-completion price adjustment.

Great care needs to be taken when documenting any completion accounts-based adjustment provisions for any deal. The parties’ accountants need to get seriously and carefully involved, as there is plenty of scope for unintended consequences.

Earn-outs

The price on a deal may contain a number of different components such that the ultimate price is not immediately clear as a headline figure in the sale agreement. As well as breaking up the price into completion payments which might be adjusted soon after completion once completion accounts have been prepared, the agreement might provide for other consideration payments which can be spread over a period of time after completion.

Some of these payments (‘earn-outs’) might be contingent on future performance targets of the business, such as future profit targets or future revenue targets or targets based on retention of particular customers. The provisions can get quite detailed, with many possible permutations and issues on which the parties need to protect their interests, and one needs to be very careful with them, ensuring also that the parties’ accountants are happy with how they work. Different earn-out payments for different periods might be capped at different amounts, or adjusted for various reasons. Some earn-outs are not capped, which means the maximum possible aggregate price payable will not be known until the end of the earn-out period.

Earn-outs are more common in share deals than asset deals, particularly because they can be calculated by simple reference to the target company’s business and accounts rather than to some part of a business carried on by the buyer. Also, earn-outs on share sales often involve selling shareholders who are staying on with the business and have some ability to manage the achievement of the earn-out targets. However, they can still be used in an asset deal if appropriate targets can be set.

Warranties, indemnities and tax covenants

The final price of any sale deal won’t actually be known until the time period for the buyer to make any claims against the seller(s) under any of the sale documentation have expired.

So, for example, in a share sale the price will have factored in the amount of any expected tax liability as shown in whatever accounts the deal has been based on (latest audited accounts, locked box accounts or completion accounts). Any share sale agreement will then include a tax covenant by the selling shareholders essentially saying that if the target company has a larger than expected tax bill which wasn’t provided for in these accounts then the seller(s) will refund the excess amount on a £ for £ basis. If this happens then it effectively reduces the ultimate sale price.

Likewise a sale agreement (share sale or business sale) may include specific indemnities about possible liabilities which the buyer became aware of during its due diligence, which might not happen (or the precise amount of which might not yet be known) but which will need to be paid by the seller(s). These could relate to anything, such as a known impending court claim against the company, or a known impending claim under employee or environmental laws. Again, the indemnity will usually provide for a £ for £ repayment by the sellers, which will again be treated as a reduction of the ultimate sale price.

And likewise any share sale or business sale agreement will include a raft of warranties – warranted statements by the seller(s) which the buyer will have relied on when coming up with the agreed price and which the buyer can make a claim under if these statements prove to have been incorrect. Again, any resulting payments by the seller(s) will be treated as a reduction of the ultimate sale price.

So at the end of the day and when all is said and done the price may not be known until all claims made within the agreed permitted claim periods have been resolved (which can be 7 years plus, particularly for tax covenants).

Non-cash consideration

In some deals the buyer might want to pay some or all of the price in some way other than cash, for example in shares in the buyer (consideration shares). This is far more usual in share sales by individuals than in business sales, and often involves sellers who are staying on in the business, sometimes with new roles relating to the buyer’s own business. This adds a whole new complexity to the deal. Effectively the sellers are now also buyers, and need to perform their own valuations and due diligence in the buyer. The consideration shares might be stated in the sale agreement to have a particular value, but at the end of the day they are worth whatever they are worth (with the particular factor that the sellers will be minority shareholders with little influence or protections or exit opportunities). Sellers need to make sure they have very good reasons for agreeing to a deal involving consideration shares. One of my first deals as a corporate lawyer (back in the 1980s!) involved a salutary lesson on this front, as a client selling a Hatton Garden jewellery company to a large buyer was persuaded to take almost the whole price in shares against my very strong advice (the owner of the buyer gaslighting me and my lack of experience in front of my client). The buyer went under shortly thereafter, losing everything he had built up, and had to effectively start all over again.

 

The next Guide in this series will explain why buyers and sellers might or might prefer to do a share deal or an asset sale deal.

What next? Contact me for a complimentary business sale consultation.

If you would like to discuss any of the issues raised in this Guide or any other issues relating to the possible sale of your business (or company!) please feel free to email me at andrew.james@onhandcounsel.co.uk to arrange a complimentary consultation where I can help you to identify what might be involved and how I can help. This will help you to avoid some of the pitfalls to which you might otherwise be exposed, and give you the peace of mind of knowing that you have an approachable competent corporate lawyer ONHAND who can provide you with experienced, effective and cost-effective advice and assistance.

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