There are many moving parts to buying or selling a business. Some key considerations are whether to conduct an asset or share sale, which can direct the process and what kind of due diligence should be conducted. It is important to know the difference between each type before negotiations begin so that you can properly assess the next step in your purchase or sale.
There are advantages and disadvantages to an asset sale compared to a share sale of a business. This blog post will discuss the advantages and disadvantages of an asset or share sale from the perspectives of both the buyer and seller, which can assist in negotiations of buying or selling a business.
What is an Asset Sale or Purchase?
For an asset sale or purchase, the buyer and seller can choose which assets to transfer. Assets can include those that are tangible or intangible. For example, tangible assets can include real property, inventory, and equipment. Intangible assets can include trade names or other intellectual property, goodwill, contracts, permits, and leases.
Asset Sale: Benefits for the Buyer
An asset sale can benefit the buyer as the buyer does not need to assume all of the business’s liabilities as they would for a share sale. This is a primary draw for a buyer to consider an asset purchase over a share sale.
In an asset sale, the buyer is generally not required to keep all of the employees. However, a seller may require the buyer to retain the existing employees or sign new contracts with the employees to avoid liability arising from wrongful dismissal claims.
There are also some tax benefits to the buyer in an asset sale. The buyer is able to increase the tax cost of depreciable assets up to the current market value, which can reduce the buyer’s tax obligations in the future because they can obtain greater deductions in capital cost allowance.
Asset Sale: Disadvantages for the Buyer
Due to the increased taxes that a seller may have to pay in an asset sale, the purchase price may be raised as well.
Asset Sale: Benefits for the Seller
A seller may be able to increase the purchase price in an asset sale, as they may be more complex, or the seller may need to pay more taxes as a result. The seller would maintain some of the liabilities, which may be reflected as an increased purchase price.
Asset Sale: Disadvantages for the Seller
Generally, asset sales can be more complex than a share sale, as it involves transferring individual assets, which can involve a substantial amount of paperwork and documentation to ensure that they are transferred properly. In some cases, obtaining authorization from third parties may be necessary to transfer an asset, which can be costly and time-consuming.
Some of the liabilities would remain with the seller rather than being transferred fully to the buyer.
What is a Share Sale or Purchase?
A share sale involves selling the corporate shares of the business to the buyer. Unlike an asset sale, the assets remain within the company in a share sale.
Share Sale: Benefits for the Buyer
If the company being purchased has significant goodwill associated, it may be beneficial to a buyer to continue operating under the seller’s company name.
The price in a share sale may also be lower since the buyer assumes all of the liabilities.
The seller may need to provide warranties and indemnities to the buyer to cover some of the liabilities that the buyer would otherwise assume in a share sale.
Share Sale: Disadvantages for the Buyer
A key disadvantage for a buyer in a share sale is that they will obtain all of the liabilities associated with the company being purchased. As a result, it is important to ensure that due diligence is properly conducted in order to assess the risks and liabilities that a buyer is taking on. Depending on the liabilities, a buyer may seek to be indemnified by the seller or another party before finalizing the purchase.
In a share sale, the company’s employees generally remain as existing employees after the sale is complete. However, some of the existing employment contracts may allow some employees to exercise certain rights upon the new ownership. As a result, severance obligations may arise, and the buyer would be liable for satisfying these requirements.
Also, in a share sale, the buyer may have a less desirable tax outcome, as it may limit the depreciation that they can claim in the future.
Share Sale: Benefits for the Seller
A share sale may be a more straightforward process for the seller as it involves transferring the shares only. However, in some cases, it may be required to obtain third-party consent before transferring the shares, such as with leases or loan agreements. Depending on the contracts involved, it may also be a straightforward process if there are terms in the contracts to address any third-party consents that may be required.
The seller in a share sale may be able to reduce taxable capital gains and pay fewer taxes overall. The seller may also be able to reduce taxes involved in transferring specific assets, as in an asset sale.
Share Sale: Disadvantages for the Seller
As there are ways to reduce taxes upon a share sale, the buyer may negotiate to buy the company for a lower price.
A seller may have to reduce their price due to the buyer taking on more risk of liabilities upon a share purchase. Also, due to the possibility of significant liabilities that the buyer is taking on, the buyer may require the seller to provide comprehensive warranties and indemnities to cover some of that risk.
For an asset sale, the parties can choose which assets to transfer. Generally, a buyer will prefer an asset sale as they do not automatically assume all of the liabilities associated with the company being purchased. An asset sale is also more beneficial tax-wise for the buyer.
A seller may generally prefer a share sale as the liabilities would automatically transfer to the buyer. In a share sale, the seller would have more tax benefits as compared to an asset sale.
The purchase price may fluctuate to reflect each party’s advantages and disadvantages in a sale of a business.
Baker & Company Lawyers in Toronto Can Assist With Buying and Selling Businesses
Choosing how to buy or sell a business through an asset sale or share sale is a significant decision that involves many considerations. There are various advantages and disadvantages to how a business is sold, which depend on the specific circumstances involved. Our trusted corporate lawyers at Baker & Company are experienced with mergers and acquisitions and can assist you with the buying and selling of businesses. Our team is dedicated to providing quality service for all of your unique business needs.
To book a consultation, please contact us online or by phone at 416-777-0100.