Pros and Cons
Before speaking to potential buyers, you will need to consider the pros and cons of an asset sale vs share sale agreement.
Depending on which country your company is located in, the type of deal you agree on will make a huge difference as to how much tax you pay. And ultimately, how much money you put in your pocket.
For the purpose of this article, we have assumed that your Amazon FBA business trades within an incorporated legal entity structure. Not as a sole proprietorship, a partnership, or a limited liability company (LLC).
Buyers look for different things in a business.
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Asset Sale
An asset sale effectively involves selling the core assets of your business, but not the legal entity itself.
In this scenario, the Amazon aggregator will pay your company for the stock, brand, intellectual property, trademarks, Amazon account, ASINs, domain names, email addresses, social media accounts, and anything else that constitutes the going concern of the business.
Asset sales generally do not include the existing cash reserves in your company bank account. You also assume all outstanding debt obligations of the business up to the point of sale.
This is commonly referred to as a cash-free, debt-free transaction.
Once the deal has been completed, you will still own the legal entity. But its assets (other than the cash reserves and additional cash receipts from the sale), will have been sold.
It will then be your responsibility to liquidate the legal entity, should you wish to do so. You can then withdraw all company cash reserves into your own personal account, net of any taxes due.
Share Sale
A share sale, in comparison, involves selling the shares (or the entire ownership) of your business.
Company structures and legal forms vary based on the country in which they are incorporated.
In the USA, for example, most companies are formed either as a regular C-corporation or as a sub-S corporation. The UK and other countries predominantly use LTDs.
Regardless of the company’s legal structure, in a share sale, the buyers (aggregators) will not only take ownership of the company assets. They will also assume control and responsibility for everything else associated with that company. For example, bank accounts, office leases, staff contracts, and all other short and long-term liabilities.
Simply put, once the sales contract has been signed, you will no longer own the going concern of your business or the legal entity.
Tax Implications
This is where it can very complicated since the tax rates and rules vary considerably from one country to the next.
We therefore strongly recommend that you discuss an asset sale vs share sale with your accountant or professional advisor before signing a Letter of Intent (LOI).
On the whole, however, you will need to consider your position with regards to two separate taxes:
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- Corporation Tax
- Personal Tax (either Income Tax or Capital Gains Tax)
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When selling your business within an asset deal, there is a possibility that you could face a double tax charge.
This is because your company, in most cases, will have to pay Corporation Tax on the proceeds from selling the assets. Then, if you want to extract the funds into your own personal bank account, you will have to pay either Income Tax or Capital Gains Tax on the money received.
Income Tax is paid on dividends if you keep the company open. Capital Gains Tax is paid if you choose to liquidate the company.
Capital Gains Tax is generally taxed at a lower rate, but there will be additional costs involved to wind down (close) the legal entity.
Share sales are, for the most part, more tax-efficient than asset sales because you do not pay Corporation Tax.
The proceeds from the sale of the business are also taxed as a capital gain, not income.
Buyers look for different things in a business.
Click to compare 150+ Amazon Aggregators to achieve your highest offer.
Worked Example (Asset Sale)
Let’s assume you have an LTD incorporated in, say, the UK and you agree to sell the business for £3m.
Under an asset sale, £3m would be paid into your business bank account on closing. This £3m would be subject to 19% UK Corporation Tax (2024 rate), which will need to be paid to HMRC.
So, £3m less 19% Corporation Tax (£570,000) = £2,430,000.
To extract the remaining £2,430,000 from your company to you, you have two options:
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- Take the money as dividends (income), paying up to the higher rate of 38% tax (!)
- Take the money as capital, after liquidating the business, paying between 10%-20% tax**
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Assuming you choose option 2 (capital payment), you should qualify for the UK’s Business Asset Disposal Relief (BADR – formerly Entrepreneurs Relief), so the taxes due would be calculated as follows:
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- 10% Capital Gains Tax on the first £1,000,000 received = £100,000
- 20% Capital Gains Tax on the balance of £1,430,000 received = £286,000
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Total Capital Gains Tax = £386,000.
Total tax on the sale of your business: £570,000 Corporation Tax + £386,000 Capital Gain Tax = £956,000.
£956,000 works out at around 32% total tax on the original £3m received in the example above, under an asset sale, based on current UK tax laws.
So, a £3m sale price less £956,000 in total tax = £2,044,000 to you, after all taxes.
Worked Example (Share Sale)
Using the same £3m, but this time considering a share sale, the numbers are certainly more appealing.
As mentioned above, you will not pay Corporation Tax on share sales so the £570,000 is immediately taken out of the equation.
£3m is paid to acquire the shares of the business from you, upon which you pay Capital Gains Tax through the UK’s BADR scheme as follows:
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- 10% Capital Gains Tax on the first £1,000,000 received = £100,000
- 20% Capital Gains Tax on the balance of £2,000,000 received = £400,000
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Total Capital Gains Tax = £500,000.
£500,000 works out at around 17% total tax on the original £3m received in the example above, under a share sale, based on current UK tax laws.
So, a £3m sale price less £500,000 in total tax = £2,500,00 to you, after all taxes.
Asset sale vs share sale
This works out at a staggering £456,000 more in your back pocket, compared to an asset sale.
Not bad at all when you consider the amount of money at play here. And it’s clearly beneficial to recognise the receipts as a capital gain (not income).
In fact, if half of your business is owned by your partner, you can use their 10% Capital Gains Tax rate allowance on another £1m. This means that you only pay 10% tax on the first £2m in the UK (not £1m in the example above), saving you a further £100,000.
Buyers look for different things in a business.
Click to compare 150+ Amazon Aggregators to achieve your highest offer.
Summary
At the risk of repeating ourselves, and since every business transaction is unique, we strongly recommend talking with your accountant or professional advisor before signing a Letter of Intent (LOI).
This article is not intended to provide specific legal and/or tax advice. The finer points of each tax jurisdiction are, therefore, outside of its scope.
Based on our many conversations with Amazon sellers, it is clear that most prefer a share sale, due to the tax advantages discussed.
Aggregators, on the other hand, like asset sales because they are easier and quicker to complete. From a buyer’s perspective, they also avoid inheriting potential liabilities. Especially contingent liabilities in the form of product claims, contract disputes, warranty issues, employee litigation, and so on.
Ultimately, it comes down to your willingness to negotiate and/or compromise. If you will not even entertain the prospect of an asset sale, you may rule out anything up to 70% of buyers. Including the one company that could make you a knock out offer.
Likewise, if you are time-sensitive and want (or need) to sell now, an asset sale is going to close much quicker. This is because the due diligence on share sales can be highly complex.
Our recommendation?
Spend time understanding the difference between an asset sale vs share sale, and specifically how each affects your tax position. We strongly suggest doing this before entering into discussions with an aggregator and, crucially, before signing an LOI.
During negotiations, one option could be to say that you prefer a share sale because of the tax advantages. You would, however, be open to an asset sale if the aggregator increased their offer to offset the amount of extra tax you would have to pay.
In this scenario, the buyer gets a quicker and cleaner sale. And you end up with the same amount in your pocket.
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