Asset Purchase vs. Share Purchase

Perhaps you want to buy a business or perhaps you want to sell one. There are two common ways through which a business can be bought or sold: sale of assets or sale or shares. In this article, we discuss some of the key considerations behind each both from a legal and tax perspective.

An asset purchase is the purchase of individual assets and liabilities of a business. A share sale is essentially a purchase of entire corporation. Choosing between an asset purchase and a share purchase is a complicated matter because more often than not, the purchaser and vendor (“seller”) would benefit from opposing structures. Typically, the seller prefers to sell shares and the purchaser prefers to purchase assets. Most often the tax implications of a transaction are of prime importance in this area. The tax consequences of the transaction may be such as to influence a change in the nature of the whole transaction.

The Purchase and Sale of Shares

When a business changes hands through the sale of shares, only one asset is involved, the shares of the particular corporation. By virtue of acquiring shares for a corporation, the purchaser, in simple terms, is acquiring the corporation itself including its underlying assets and liabilities (known and unknown). Given the conveyance of liabilities, sellers prefer to sell shares of the corporation in order to avoid being left with unwanted liabilities from the corporation. The secondary reason for sellers with a share sale is to take advantage of the capital gain exemption (subject to availability under the Income Tax Act).

From a seller’s perspective, the selling of their business through a sale of shares rather than the assets will provide that any gain realized on the share sale is usually a capital gain, and thus, only 50% of the gain is taxable in the seller’s income. Also, the entire capital gain realized on a sale of shares may be exempt from tax under the lifetime capital gains exemption, which allows a seller who is an individual to receive up to $884,484 (indexed annually for inflation) of capital gains free of income tax. Further, a share transaction is usually a less complicated legal transaction.

The disadvantages, however, from the perspective of a seller in a share transaction include the inability to retain any existing losses of the corporation and the inability to retain certain assets, unless transferred out of the corporation prior to closing.

The Purchase and Sale of Assets

An asset sale consists of the sale of individual assets of a company such as equipment, fixtures, goodwill, trade names, telephone number, inventory, leasehold and licenses. An asset sale is generally less favourable to a seller because all or some of the proceeds may be fully included in income. One reason why a seller would prefer not to sell its assets is because in an asset sale there are two levels of taxation: (1) at the corporate level; and (2) at a shareholder level when the corporation distributes the after-tax proceeds to the shareholders as a dividend and the shareholders pay tax on the dividend.

In an asset transaction, the seller has the ability to retain certain assets it does not wish to include as part of the sale. The seller can also use certain losses in the corporation to offset the income arising on the sale of the assets. Overall, an asset transaction is a more favourable structure if selling one division of a corporation while retaining another.

Despite the aforementioned, there are disadvantages for the seller. Any liabilities of the business not specifically assumed by the buyer will remain with the responsibility of the seller during an asset purchase. The seller may also run the risk of being left with unwanted assets which may be hard to dispose of when not selling the business as a complete package, such as obsolete inventory, equipment, or stale accounts receivables.

Given the nature of asset transactions, and depending on the number of assets being sold, asset transactions are usually more complicated compared to a share purchase.

Employees of the Business

Employment considerations should not be lost among a purchaser and seller of a business. For example, purchasers in an asset transaction are not obligated to keep any of the non-unionized employees. When acting for the seller during an asset transaction, the purchase agreement should be carefully drafted to ensure that the buyer is liable for all obligations relating to the employees post-closing, which will include obligations related to termination pay and severance. From the perspective of a seller, sellers often want to ensure employees retain their employment. In the case of a share sale, the corporation will continue to employ all of the employees after the closing of the transaction. That is, the buyer will inherit all of the employees of the business as the ownership of the shares of the corporation is the only thing that is changing.

Timeline

Typically, the sale of a business will not be completed in less than 6 to 8 weeks. While simple transactions may be completed in less, complex transactions often take months to complete from the initial discussions with the buyer to final closing. Legal costs are dependent on the complexity of such deals and the work required to negotiate and prepare the necessary documentation.

Bottom Line

It is often the case that a buyer only wants to buy the assets to minimize the risks whereas a seller wants to sell the shares to take advantage of the capital gains exemption. Whether the sale involves assets or shares, there are many considerations you need to be aware of to ensure the transaction goes smoothly.