If you are buying or selling a business, which is right for you: share sale vs. asset sale? Each option has advantages and disadvantages which can impact everything from purchase price to legal liability to tax implications.
The basics: share sale vs. asset sale
Understanding the difference between an asset purchase and a share purchase is the first step to choosing the right structure for your transaction:
- In an asset sale, the buyer only purchases the assets of the business that it wants to buy. This can include both tangible assets (e.g., land, vehicles, stock, machinery) and intangible assets (e.g., contracts, intellectual property, goodwill). By “picking and choosing” which assets to buy, the buyer can avoid undesirable assets, debts, and liabilities. The transaction can include the purchase of the business’s name, or the buyer can use the assets to operate as an entirely new business.
- In a share sale, the buyer purchases the shares of the business. Ownership and control of the business are transferred to the buyer, while the business continues to operate as usual. All assets, liabilities, and obligations of the company—whether known or unknown—are acquired by the buyer. Due diligence is crucial.
Note that a share sale can only be used where the business to be purchased is an incorporated company, whereas an asset sale can be used to purchase any business, regardless of its structure.
Implications of a share sale vs. asset sale
It is important to understand the implications of an asset purchase vs. a share purchase. Here are just some of the factors to consider:
- A share sale is often “smoother” than an asset sale as the entire business is sold as a going concern. For example, there is no need for new employee contracts with a share sale as the employees continue to be employed by the company that is purchased.
- In comparison, an asset sale is often logistically more complex and heavier on paperwork, requiring legal transfer of real property, leases, contracts, etc.
- An asset sale can trigger negative tax implications for the seller (e.g. recapture of capital cost allowances, ineligibility for Lifetime Capital Gains exemption). As such, a seller will typically demand a higher purchase price if the buyer insists on an asset sale.
- On the other hand, a share sale generally involves greater risk for the buyer as the buyer will assume all liabilities, both known and undisclosed/contingent. The buyer in a share sale may seek to have the purchase price reduced to factor in the increased exposure to risk.
As you can see, there is always tension between what is best for the buyer and what is best for the seller. Protect yourself and your investment by getting legal advice from an experienced corporate/commercial lawyer before negotiating the purchase or sale of a business.
