Share sale or business sale? 4: What liabilities is the buyer taking on?

June 2025

Rating system:
Reading time (1-10 minutes): 2
Sophistication level (1 (idiot) – 10 (expert)): 4
Entertainment value (1 (turgid) – 10 (side-splitting)): 4

This is the fourth 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…).

This fourth Guide focusses on some of the things to think about based on what liabilities the buyer might be taking over as part of the sale.

Share sales

In a share sale the buyer is taking over ownership of the target company. It gets the company and its business warts and all. As well as all the assets the company owns, the company comes with all of its obligations and liabilities. So it comes with all its contractual obligations, obligations to employees, its creditors, litigation claims and risks of claims, tax liabilities, regulatory liabilities and any other obligations and liabilities it might happen to have. You name it, you got it.

As a result, you can expect a whole lot more due diligence to take place on a share sale, and a whole lot more warranties and indemnities covering areas of possible risks and liabilities which would come along with a company whose shares are being sold but which a buyer would not be taking on if it bought that company’s business and assets instead.

Of course, these all remain the company’s liabilities. They do not suddenly become liabilities of the buyer itself. So if for example a buyer has paid £100,000 to buy a company which it later discovers has liabilities of £200,000, its worst case scenario is that it can write off what it paid and arrange for the company to be insolvently wound up owing these liabilities.

Business sales

A general rule of law is that you can’t simply transfer a liability you have to someone else. If I owe the taxman money I can’t simply enter a contract with you which says that you now owe the taxman that money instead. If I’ve sold defective products to a customer I can’t simply enter into a contract with you which says that you are now liable to that customer instead of me.

So in a business sale, where a buyer buys the business and selected assets as a going concern from a selling company, the buyer doesn’t automatically take on any liabilities (with a few limited exceptions – see below).  Obviously this is one good reason for a buyer to prefer to buy a business from a company rather than buy the company itself. It will usually be very happy not to take on most liabilities, such as tax liabilities of the company, or any other liabilities relating to things the seller company may have done in the past and could be prosecuted or sued for. These are the seller company’s’ liabilities and will stay with the seller company.

Likewise, in a business sale the buyer won’t automatically take on liabilities to trade creditors. However, the buyer may want provisions to protect it from damage to the business it is buying which might be caused by the seller failing to pay creditors who are also continuing suppliers to the business. The sale contract will usually say that the selling company must pay all its creditors (using retained cash and the proceeds of any retained book debts). Sometimes a buyer may agree to pay creditors as agent for the seller (on terms which need to be negotiated and agreed).

There are however some liabilities that a buyer may be prepared to take on because of the related commercial benefits it might get from agreeing to do so. In particular, when it comes to taking over contracts with suppliers or customers, there will be an element of negotiation over what related liabilities the buyer may agree to take on responsibility  for, at least between itself and the seller company.  This could include how creditors who are ongoing key suppliers of the business might be dealt with, and how ongoing warranty obligations to ongoing customers might be dealt with. This can raise all sorts of complex issues, none of which need to be specifically addressed in a share sale. A later Guide in this series explains in a bit more detail how business sale agreements might cater for how to deal with ongoing contracts with suppliers, customers or others.

Although a buyer may not be taking over specific liabilities owed by the selling company, it will clearly nevertheless be taking on an element of commercial risk because it will be looking to present itself to the world as carrying on the business which the seller company had been doing, and it will be relying on the name and reputation the seller company had in the marketplace. Any liabilities the seller company may have, and anything it might have done in the past, could end up damaging the buyer. So the buyer will still want a degree of due diligence and warranty protection to reassure itself.

There are also a few areas where a buyer does need to beware of potential liabilities which it might take over, not because of contract law but because the Government has passed specific laws which have this effect. This includes:

• Employment laws (‘TUPE’) which have the effect of making a buyer take over all the seller company’s obligations and liabilities to its employees, including all their accrued employment rights). As a result, when it comes to employment issues the due diligence and the warranties and indemnities that need to be covered in the sale agreement are often quite similar in both share sales and business sales.TUPE also imposes various obligations on buyers and sellers in business sales, such as the need to inform and consult with employees. The asset sale agreement will need provisions relating to how the parties have complied with their obligations under TUPE.

• Environment laws whereby for example a buyer can be required to takeover compliance and clearing up obligations where it acquire contaminated land where the original contaminator can’t be found.

That’s all for now. The next Guide in this series will focus on how to make sure that each type of asset which forms part of a business being sold is properly transferred under a business sale agreement.

If you want to see any of my previous Guides on company sales (or on shareholder arrangements and joint ventures) click HERE

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.

Would you like to receive further Guides and other published articles containing legal updates and tips? If so, click below…
Sign up for more Guides and legal updates