Buying the shares or the assets: how the structure changes tax, risk and funding

Most SME purchases start with a price and a handshake. The question of what you’re actually buying (the company itself, or the business it runs) often isn’t asked until the lawyers draft the agreement. By then, the answer has already changed your tax position, the liabilities you take on and the amount of money you need on settlement day.

This guide sets out how the two structures differ for a buyer of an established New Zealand business, and how lenders look at each one.

What’s the actual difference between a share and an asset purchase?

In a share purchase, you buy the shares in the company that owns the business. Nothing inside the company changes hands. The company keeps its bank accounts, contracts, staff, leases, debtors, creditors and tax history. Only the owner changes.

In an asset purchase, your own company (often a new one set up for the deal) buys selected assets from the seller’s company: typically plant and equipment, stock, goodwill, intellectual property and the business name. The seller’s company stays with the seller, along with anything you didn’t agree to take.

Why do buyers and sellers usually want different things?

There’s a built-in tension.

Sellers often lean towards a share sale. Inland Revenue’s guidance on tax on business share sales notes that gains on selling shares in a company you operate a business through are usually non-taxable. A share sale also avoids depreciation recovery, where a seller’s company pays tax on depreciation previously claimed if plant sells for more than its tax book value.

Buyers often lean towards assets. You leave behind tax and employment disputes, old warranty claims and any debts you didn’t know about. You also get a fresh tax base for depreciable plant.

That tension is negotiable. A seller who insists on a share sale may accept a lower price, wider warranties or a retention. A buyer who insists on assets may need to pay more to cover the seller’s extra tax. Get a view from your accountant on the after-tax difference before you make your first offer, not after heads of agreement are signed.

How do the purchase price allocation rules work on an asset deal?

On an asset purchase, the single headline price has to be split across classes of asset, because each class is taxed differently. Trading stock is taxable to the seller and deductible to the buyer. Depreciable plant can be depreciated by the buyer. Goodwill is capital: the seller doesn’t pay tax on it and the buyer can’t deduct it.

Since 1 July 2021, Inland Revenue’s rules for setting up an asset sale say that where two or more assets are sold, the split should reflect market value. If you and the seller agree an allocation, you both file on that basis. If you don’t, and the total price is $1 million or more:

1. The seller has three months from settlement to set the allocation and notify you and Inland Revenue.
2. If the seller doesn’t, you have a further three months to set it and notify them and Inland Revenue.
3. If neither of you does, Inland Revenue can allocate the amounts and the buyer’s deductions may be held back.

The practical lesson: put the allocation in the sale agreement. A schedule that splits the price across stock, plant and goodwill takes an afternoon with the valuer and your accountant, and it saves an argument later when the seller’s adviser is trying to minimise depreciation recovery and yours is trying to maximise deductions. Our guide on stock at valuation covers the stocktake side.

What do you inherit when you buy the shares?

Everything. That’s the attraction and the risk. A share purchase can be far simpler where the company holds things that are hard to transfer: a long lease, supplier agreements, a franchise, government contracts, licences or consents. Those usually stay in place, although many contain a change-of-control clause that still needs the other party’s consent.

The tax position needs particular care:

• No reset of asset values. The company keeps depreciating plant at its existing tax book value, however much you paid for the shares.
• Tax losses may be lost. Losses carried forward survive a change of ownership only if the company meets the shareholder continuity test or the business continuity test.
• Imputation credits. IRD’s guidance says a company can’t carry forward its imputation credits if a sale causes “more than a 34% change” in shareholder ownership.
• Historic tax debts and errors come with the company. Your protection is due diligence, plus warranties and indemnities backed by a retention or escrow.

This is why our due diligence checklist goes deeper on a share purchase: IRD account history, GST and PAYE filings, employment disputes and every registration on the PPSR against the company.

What happens to the staff?

In a share purchase, the employer is still the same company, so employment simply continues. Leave balances, service history and any problems stay with it, and you should price accrued annual leave into the deal.

In an asset purchase, employees don’t automatically move across. The seller ends their employment, and the buyer decides whom to offer new agreements and on what terms. Workers in some specified categories, such as cleaning, catering and security work, have extra rights to transfer under Part 6A of the Employment Relations Act. Your lawyer will check whether these apply. Either way, agree in writing who pays out or takes over accrued leave, because it can be a material number in a business with long-serving staff.

Weighing up a deal and want to know how a lender would view your preferred structure? Start a short enquiry. It takes about a minute.

How does the structure change the funding you need?

This is where the choice turns into dollars.

On an asset purchase, you typically pay for plant, stock and goodwill, and nothing else. The debtor book stays with the seller, who collects it. That means your new company starts with no money coming in from debtors while it pays wages, rent and suppliers from week one. You need working capital on top of the price, often equal to four to eight weeks of costs. Our guide to the working capital ratio shows how to size it.

Security is relatively straightforward. Your company owns the assets, so a lender can take a general security agreement over them, often alongside a mortgage over property.

On a share purchase, the price usually reflects the company’s value after its debt and working capital. In practice that means the enterprise value, less the company’s bank debt, plus its surplus cash, with a working capital adjustment at completion. Debtors and creditors come with the company, so day-one working capital is less of a cliff.

The funding is more complex, though:

• Existing bank debt inside the company usually has to be repaid or refinanced at settlement, because the seller’s guarantees are being released. That amount needs funding too.
• The borrower is usually you or your holding company, while the assets that generate the cash sit in the company you’ve bought.
• Security from the company being bought. If the lender wants a guarantee or general security agreement from it, that counts as the company giving financial assistance for the purchase of its own shares. Sections 76 to 81 of the Companies Act 1993 set out the board process and solvency test required. It’s routine for lawyers, but it has to be timed with settlement.

On the tax side, Inland Revenue says interest and financing costs on a share purchase “can usually be claimed as an expense”. Confirm with your accountant how that applies to your structure before you draw down.

A worked example

Illustrative scenario only, not a real client. A buyer agrees to acquire an engineering and fabrication business in the Waikato. The valuer puts the enterprise value at $1.6m.

Option A: assets. The buyer’s new company pays $1.6m, allocated in the agreement as $180k stock, $420k plant and $1m goodwill. Because the price is over $1 million, the purchase price allocation rules apply, and the agreed schedule settles them. The buyer can depreciate the plant from $420k and deduct the stock as it’s sold. The debtor book of about $300k stays with the seller, so the buyer arranges a $250k working capital facility alongside the purchase funding.

Option B: shares. The company has $200k of bank debt and $60k cash. The share price is set at $1.46m ($1.6m less debt, plus cash), with a completion adjustment if working capital comes in above or below an agreed level. The buyer funds $1.46m for the shares plus $200k to clear the company’s existing loan at settlement. The plant stays at its tax book value of about $260k. A tax loss of $40k from a weak year is preserved only if the continuity rules are met. The lender takes a mortgage over the buyer’s commercial property and, after the financial assistance process, a guarantee and GSA from the company.

Total cash out is similar. The difference lies in where the risk sits, what’s deductible, and how much working capital the buyer has to bring from day one.

Questions to settle before you sign heads of agreement

1. Which structure does the seller want, and what’s the after-tax difference to them?
2. Are there contracts, leases or licences that make a share purchase much simpler?
3. What are the debtors, creditors and accrued leave worth today?
4. On an asset deal, what will the price allocation schedule say?
5. On a share deal, what bank debt has to be cleared at settlement, and which PPSR registrations need releasing?
6. Who will be the borrower, and what security can you offer?

Getting the acquisition funded the right way

Choosing between shares and assets is really a choice about where risk and cash sit after settlement, and the funding has to be built around that answer, not bolted on afterwards. Established businesses are bought and sold this way every week, and the deals that go smoothly are the ones where the structure and the money were lined up early. We arrange acquisition finance for both kinds of deal, whether that means a loan secured on property, a working capital facility for an asset buyer starting without a debtor book, or funding to clear a target’s bank debt on a share purchase.

Starting the conversation takes about 60 seconds, and simply asking won’t leave a mark on your credit file. There’s no credit check at the enquiry stage. Your details aren’t passed around to a long list of lenders either, so you won’t be fielding calls from strangers. A real person reviews your situation, including the deal structure, price and settlement date, and then calls you. Please complete the form accurately, especially the amount, the security and what the funds are for, so we can line up the right option first time.

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