Asset Purchase or Share Purchase: What Actually Moves

A share purchase buys the company itself, so everything inside it travels: contracts, licences, employees, borrowings and whatever has not surfaced yet. An asset purchase buys named assets and named liabilities and leaves the rest with the seller. The choice changes what is paid for, what has to be moved item by item, and which side keeps the unknown.

One distinction comes before any of the paperwork, and the whole comparison lives in it. A business is a set of useful things: machines, stock, a lease, a licence to operate, people who know the process, customers who keep sending orders. A company is a separate creature. A company is a legal person that happens to hold those useful things, and it also holds the receipts of everything it has ever done. The two are not the same object, and either one can be bought.

Consider a sweet shop on a busy lane, run for nineteen years by one household. A buyer wants the shop. There are two honest ways to get it. The buyer can take the ovens, the counters, the recipes, the stock in the trays and the tenancy of the premises, and start trading under a new name from Monday. Or the buyer can take the shop as it stands. Taking the shop as it stands means stepping into the position of the people who ran it: the same registration, the same accounts, the same electricity connection, the same supplier ledger, and also the same argument with the neighbour about the drain that nobody has bothered to settle. In the first version the buyer chooses what to carry. In the second version the buyer carries everything, including the drain.

The same choice runs through transactions large enough for the arithmetic to be written down. The choice between an asset purchase and a share purchase is not a choice about price; it is a choice about what comes attached to the price, and the price then adjusts to reflect it.

Harivansh Packaging Limited, an invented manufacturer listed on both Indian exchanges, makes rigid and flexible packaging for food and personal care customers. Harivansh Packaging is buying 100 per cent of Sundarban Polymers Private Limited, an invented unlisted maker of flexible packaging films that sells to some of the same customers. The enterprise valueA measure of what the whole business is worth to everyone who has a claim on it, lenders included, before any borrowings are subtracted. agreed is Rs 1,320 crore, or 10.0 times the target's earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs 132 crore. Sundarban Polymers carries net debt of Rs 180 crore, so the equity valueWhat is left for the holders of the shares once the borrowings are taken out of the enterprise value. The equity value is the amount that reaches the sellers. is Rs 1,140 crore. Rs 1,320 crore and Rs 1,140 crore are the two headline prices to compare, and the Rs 180 crore between them explains everything.

What does a share purchase actually buy?

A share purchaseA purchase of the shares of a company, so the company itself carries on unchanged and only the identity of its holders is different. is best defined by what it does not require. Harivansh Packaging Limited buys the shares of Sundarban Polymers Private Limited from the people who hold them. The moment that is done, the company underneath is exactly the company it was the day before. Sundarban Polymers has the same registration number, the same bank accounts, the same lease on the same factory, the same licence to operate, the same employees on the same terms, the same customers on the same contracts and the same Rs 180 crore of borrowings on the same schedules. Nothing inside the company needed to move, so nothing inside it moved. One line changed, and that line sits above the company rather than inside it.

Ask what work that saves. In a business of any size there are hundreds of arrangements: a factory lease, a dozen supply contracts, a handful of customer contracts, equipment leases, an insurance policy, a software subscription, employment terms for several hundred people, and a licence or two without which the plant cannot run. Every one of those is a relationship between Sundarban Polymers and somebody else. Sundarban Polymers is still Sundarban Polymers and still the counterparty to every one of them, so in a share purchase not one of them is touched. That is not a small administrative convenience. Skipping that work is often the reason the route is chosen at all.

The cost of that same property follows from the same fact. If the company continues unchanged, then it continues unchanged in both directions. The good arrangements come across, and so do the ones nobody has mentioned. A dispute from four years ago that has not yet been raised is still the company's dispute, and the company now belongs to the buyer. A tax position taken in an old year that somebody later disagrees with is still the company's position. An employee claim that has been quietly building is still the company's claim to answer. Nothing was moved, so nothing was left behind, and the buyer of the shares becomes the current holder of a business and of every consequence that business has already created.

Experienced buyers therefore do not describe a share purchase as buying a business. The phrase they use is buying a history with a business attached. The history is usually fine. The point is that the buyer has taken it, and took it whether or not it was found.

What does an asset purchase leave behind?

An asset purchaseA purchase of named items out of a company rather than of the company itself, so only what the document lists changes hands. is defined by what it does require. Harivansh Packaging Limited does not buy the shares. The buyer takes named things out of Sundarban Polymers Private Limited: the film lines, the moulds, the stock, the receivables it agrees to take, the factory lease, the supply contracts it wants. Alongside the list of what it takes, the buyer names the liabilities it agrees to carry, a short list of ordinary trading items such as the payables and the dues of the staff who come across. The second list is the set of assumed liabilitiesThe obligations a buyer expressly agrees to take over in an asset purchase. Anything not on the list is not the buyer's, however ordinary it looks., and its length is negotiated line by line.

Then comes the sentence that does all the work in this route. Anything not on either list stays exactly where it is, with Sundarban Polymers. In an asset purchase the schedule is not a description of the transaction; it is the transaction, and an item left off it does not move, whether or not either side noticed. That cuts both ways and it cuts hard. A buyer who forgets to list the moulds has not bought the moulds. A buyer who does not list the old dispute has not bought the old dispute, and that omission is the reason many buyers want this route in the first place.

People who have not seen an asset purchase done are often surprised by what is left on the seller's side afterwards. Sundarban Polymers still exists. The company has sold its business, so it no longer makes anything, but it is still a company with a name and a registration and its whole past. Its holdings are now cash, its remaining borrowings and every obligation nobody agreed to take. The money went to the company, not to the shareholders, so the shareholders have not yet received anything at all. Getting the money out to the people who hold the shares is a further step with its own consequences, and those consequences are decided by tax rules rather than by anything in the transaction papers.

The sweet shop version is exact. If a buyer takes the ovens and the trays and the tenancy, the old shop is still a going concern on paper, holding the buyer's money and the unsettled argument about the drain. The old shop is emptier, richer and just as responsible for its own past as it was the week before.

Which route carries the liabilities nobody has found yet?

The whole comparison turns on one pivot, and the pivot is worth slowing down for. Both routes get the buyer the same machines, the same customers and the same production. The two routes differ on where the unknown ends up.

The unknown has a shape. The unknown is not a mystery but an ordinary category. Somewhere in nineteen years of trading a business will have taken a position that somebody may later dispute: a supplier who believes a contract was ended too early, an old tax treatment somebody reads differently, a former employee with a claim not yet filed, a product batch that turns out to have been faulty. Nobody has raised any of it yet, so none of it is on any statement. Diligence looks for it and diligence finds some of it. A claim nobody has raised yet cannot be found, so a residue is left over that no amount of looking can clear.

The company that created that residue is the company the buyer now holds, so in a share purchase the residue arrives with the company. In an asset purchase the residue stays with the seller, unless it was named on the schedule and taken on purpose. This is called successor liabilityThe idea that whoever steps into a business may also step into obligations it created earlier, depending on the route taken and on what the law provides. when it does follow a buyer, and the extent to which it follows anybody in a given case is a legal question rather than an arithmetic one.

Watch what that does to a negotiation. The effect is invisible from the outside. The two sides are now arguing about a risk that neither of them can size. The seller says the residue is nothing and the buyer cannot prove otherwise; the buyer says it might be large and the seller cannot prove otherwise. Neither side is being unreasonable and no fact settles it. Route arguments therefore run long, and they are rarely won on evidence. The parties end up pricing a disagreement rather than a number, and it shows up either in the price, in the indemnity package, or in the choice of route itself.

A household version makes the asymmetry obvious. Buying a second-hand car from a dealer who issues a fresh registration in the buyer's name is different from taking over somebody's vehicle along with the challans they have not paid. The car is identical. The obligations that follow the car are not identical, and the price should not be either.

Why do the two routes quote different prices for the same business?

Now the arithmetic, and it is one subtraction seen from two sides. The record fixes an enterprise value of Rs 1,320 crore for Sundarban Polymers Private Limited, being 10.0 times its EBITDA of Rs 132 crore. The enterprise value prices the whole business: everything that everybody with a claim on it is entitled to, lenders included. The company carries net debt of Rs 180 crore. Subtracting the Rs 180 crore leaves Rs 1,140 crore, and that is what belongs to the people holding the shares.

Run the share route first. Harivansh Packaging Limited buys the shares, so it pays the sellers Rs 1,140 crore, and Sundarban Polymers carries on as a subsidiary held in full, still carrying its own Rs 180 crore of borrowings. The sellers receive Rs 1,140 crore. The borrowings did not have to be cleared to make the transfer work, so nothing is repaid out of the proceeds.

Now run the asset route. The buyer is taking the business and not the borrowings, so what is being paid for is the enterprise: Rs 1,320 crore. But notice who receives it. The Rs 1,320 crore is paid to Sundarban Polymers Private Limited, not to the people who hold its shares, and that distinction is the whole reason the two headline numbers differ. The company takes the Rs 1,320 crore, clears the Rs 180 crore it owes, and is left with Rs 1,140 crore for the people who hold it. The identical figure appears, by a different route, one step later.

Read the last row and then read the first row again. The pair is the finding. The headline prices differ by exactly Rs 180 crore and the sellers end up with exactly the same amount. The difference between the two headlines is not a difference in generosity but a difference in what the number measures. Anybody comparing the two headline numbers without running that bridge from enterprise value to equity value has learned nothing at all about which route is more generous.

There is a plain-language version of the bridge that is worth carrying around. Ask what is included in the price. If the borrowings are included, the number is bigger and somebody has to clear them. If the borrowings are excluded, the number is smaller and they stay with whoever already carries them. The business did not change size between the two sentences.

Does the goodwill change with the route?

A figure built correctly appears twice by different paths, so goodwill is a good place to check the arithmetic. GoodwillThe amount paid above what the acquired business carries on its own books. Goodwill appears on the buyer's balance sheet as a single line until it is analysed further. is the excess of what was paid over what the business carries on its books, and both routes buy the same business, so the excess cannot depend on which side of the borrowings the buyer happens to be standing on.

Take the share route. Harivansh Packaging Limited pays Rs 1,140 crore. Sundarban Polymers has net worth of Rs 320 crore. Rs 1,140 crore less Rs 320 crore is Rs 820 crore.

Take the asset route. The buyer pays Rs 1,320 crore for the business without its borrowings. The right comparison is now not net worth but capital employedThe total funding standing behind a business, being what the holders of the shares have in it plus what has been borrowed.: net worth of Rs 320 crore plus net debt of Rs 180 crore, so Rs 500 crore for Sundarban Polymers. Rs 1,320 crore less Rs 500 crore is Rs 820 crore. Rs 180 crore was added to the price and Rs 180 crore was added to the book figure it is measured against, so the two additions cancel exactly and the same Rs 820 crore appears from both directions.

Two things must be said about that Rs 820 crore before leaving it. First, it is the figure before any part of it is analysed into identified intangibles such as a customer relationship or a brand, and how that analysis is done is set out under purchase price allocation. Second, a large number in that line is not by itself a verdict. A large figure says the price stood well above the book figure, and that is ordinary for a business whose value sits in customers and process rather than in machines.

What happens to contracts, licences and employees?

Return to the schedule. An asset purchase gets expensive there, in a way that never shows in the price. Every item on that list has to actually move, and moving is not the same as listing. A machine moves when it is handed over. A contract does not. A contract is an agreement with somebody else, and that somebody else has a view.

Many commercial contracts can only be transferred with the agreement of the other side, a requirement usually described as a consent to assignA clause requiring the other party to a contract to agree before that contract can be handed to a different company.. Whether a particular contract carries one, and in what form, is settled by the contract itself, and no general rule covers it. The effect of a consent requirement on a transaction is general, though, and worth stating plainly.

A consent requirement hands the counterparty something to ask for at the exact moment the buyer can no longer walk away. Follow the sequence and it becomes obvious. The price is agreed. The documents are signed. Diligence is spent. Both sides have told their people. And now the buyer has to go to the target's largest customer and ask them, politely, to agree to a change of counterparty. The customer has done nothing wrong and has no obligation to be helpful, and may notice quite reasonably that a change of counterparty is an excellent moment to renegotiate terms. The negotiation the buyer is now having is with somebody who was never party to the purchase and who has no interest in it completing.

Licences are worse. A licence is not always transferable at all. A permission granted to Sundarban Polymers Private Limited to operate a particular process at a particular plant may simply not be a thing that can be handed to somebody else; a fresh application may be the only route. Each licence carries its own requirements, decided by whoever issues it. The shape of the problem is what counts. The business cannot run without a licence and the schedule cannot supply one, so a licence that cannot be moved is not an inconvenience in an asset purchase but a hole in the plan.

Employees are a third category again. In a share purchase their employer has not changed, so nothing happens to them. Only the identity of the people holding their employer is different. In an asset purchase the people have to move from one employer to another. Each move is a real transaction, with terms and continuity to be settled under employment law. The move is a separate exercise, with its own timetable and its own capacity to go wrong.

Which route is quicker to complete, and which is easier to live with?

An experienced buyer asked which route is easier will not give an answer. The honest answer is a question back: easier when? Neither route is the easy one; the effort is the same work sitting at a different point in time, and the two routes simply choose different points.

A share purchase is usually the quicker one to complete. There is one transfer, the shares, and the machinery of the business is undisturbed underneath it. Nobody has to be asked for permission to move a lease, nobody has to be persuaded to novate a supply contract, no employee has to sign anything, and the plant runs on Monday exactly as it ran on Friday. The transaction can close and the business does not notice.

The weight arrives afterwards. A whole company has been taken, with its own accounting policies, its own systems, its own suppliers on its own terms, its own way of quoting for work, and its own understanding of how things are done. All of that has to be lived with or changed, and changing it is slow. A quiet completion can be followed by two years of unpicking.

An asset purchase is the reverse. The completion is heavy: schedules to negotiate, consents to obtain, licences to apply for, employees to transfer, a hundred small movements each of which can stall. But what arrives is what was chosen. There is no unfamiliar history in the accounts, no obligations that were never listed, and no legacy positions to discover. The business starts inside the buyer rather than beside it.

Sitting inside that table is a practical consequence for the people running the transaction. The share route puts the risk of failure late, in the years after everyone has moved on to the next thing. The asset route puts it early, where it is visible, where the deal team is still assembled and where a problem can still stop the transaction. Which of those a buyer prefers depends on what that buyer is able to manage, and that is a fact about the buyer rather than about the routes.

Who wants which route, and why do the two sides pull apart?

By now the pattern should be predictable, and it is worth naming because it explains why route discussions have the temperature they do. Sellers usually push for a share purchase. A share purchase takes the company and everything it ever did off their hands in one movement. The sellers stop being responsible for the past, they receive the money directly, and there is no emptied company left over to wind down. The exit is clean in the most literal sense: the company that carried the history is no longer theirs.

Buyers often push the other way. An asset purchase leaves the history where it was made. The buyer takes the machines, the customers and the people and leaves behind nineteen years of positions it did not take and cannot fully inspect. Both sides are asking for the same thing: for the unknown to sit with the other one. The disagreement is a genuine conflict of interest rather than a misunderstanding.

Argument does not resolve the conflict. Price and paper do. If the seller insists on a share purchase, the buyer will want compensation for carrying the past. The compensation appears as a lower price, as a larger indemnity package, or as money held back for a period. If the buyer insists on an asset purchase, the seller will want compensation for the mess left behind and for the consents that have to be chased, and the compensation appears as a higher price. Where the two sides land shows up in the numbers, not in the minutes. Reading only the route says very little about who won.

There is also the practical constraint that overrules preference altogether. If a licence cannot be transferred, or a critical contract will not be consented, the asset route may simply not be available at any price, and both sides know it. Preference decides the argument only where both routes actually work.

How do a lender, an analyst and the buyer's own team read the route?

The choice of route is not a legal detail that stays in the documents. The route changes the numbers that three different readers look at first, and each of them starts somewhere different.

A lender being asked to fund the purchase starts with what it is lending against and what else has a claim on the same cash. In the share route the target's Rs 180 crore of borrowings arrives inside the group along with the business, so the lender's first question is what those borrowings are, who holds them, whether they fall due on a change of holder, and where they rank. In the asset route those borrowings are cleared out of the proceeds and the lender is funding a clean set of items. The same business, at the same enterprise value, presents the lender with two quite different pictures of what stands ahead of it.

An analyst reads the route as a question about which balance sheet to read. Take the recorded funding for the share route: Rs 140 crore of the buyer's own cash plus Rs 1,000 crore of new borrowing, taking borrowings from Rs 740 crore to Rs 1,740 crore with cash at nil. The Rs 1,740 crore is the acquirer's own net debt on a standalone basis. Against its own EBITDA of Rs 477 crore, the figure is 3.65 times. On a consolidated basis, including the Rs 180 crore that came across with Sundarban Polymers, net debt is Rs 1,920 crore against combined EBITDA of Rs 609 crore, or 3.15 times. Both figures are correct and they are not interchangeable, so an analyst who quotes a leverage number without naming the basis has said something that cannot be checked. Opening leverage, before any of this, was 1.26 times.

The buyer's own finance team reads the route as a question about what lands in their lap in April. Devyani Kulkarni, the chief financial officer of Harivansh Packaging Limited, is not primarily thinking about the headline. She is thinking about how many sets of accounting policies her team will be reconciling, how many statutory filings there will now be, and whether the group will be answering questions about positions taken by a business it did not run. Ashwin Rege, who leads the transaction team, is thinking about which consents have to be chased before completion and which of them can realistically be obtained. The two of them will often prefer different routes, and both of them will be right about their own year.

The household version holds. Taking over a relative's shop as a going concern means inheriting their supplier ledger and their reputation on the lane; buying only their equipment means starting fresh and slower. Neither is obviously better, and the person who has to run it should get a say.

Where the after-tax comparison is settled

The after-tax outcome turns on rules that change from year to year, and a remembered summary of them is worse than nothing. The tax and duty treatment is frequently the factor that actually decides the route in practice. Two structures that look equivalent in the arithmetic above can be very different once the treatment on each side is worked through, and the difference can be larger than anything else on the table.

The shape of the disagreement can be described without stating any rule. The two routes are not symmetrical: what is efficient for one side is not automatically efficient for the other. The asymmetry is one more reason the two sides pull apart. And the treatment is set by tax law rather than by anything the parties write in the transaction papers, so it is not something a clause can fix. The treatment is confirmed against the current tax rules rather than recalled from memory.

So the discipline is simple. The factor is named as decisive, and the place where it is settled is named with it. When somebody in a meeting says the asset route is better because of the tax, the right response is neither to agree nor to disagree. The response is to ask which treatment is meant, on which side, and confirmed against what.