Buying or Selling a Business: Share vs Asset Sale

Business acquisitions and sales can be made through asset or share sales, each with distinct legal and strategic implications under Ontario’s legal statutes, such as the Business Corporations Act and the Income Tax Act.

Before commencing negotiations for a business’s purchase or sale, carefully considering whether to conduct an asset or share sale is imperative. This decision can significantly impact the transaction process and determine the type of due diligence that will be necessary. It is essential to clearly understand the differences between the two types of sales before engaging in negotiations.

Both asset and share sales present distinct advantages and disadvantages for the buyer or seller. This article aims to provide an in-depth analysis of the pros and cons of each type of sale from the perspectives of both the buyer and seller. By comprehending these factors, one can make informed decisions when negotiating the purchase or sale of a business.

Share Sale

A share sale is a process in which a buyer purchases all the shares of a company from its current shareholders to acquire ownership of the company. Unlike an asset sale, which involves buying and selling specific company assets, a share sale involves purchasing the entire company, including its assets and liabilities. This means the buyer assumes control of the company’s operations, assets, and liabilities, including all contractual relationships, assets like contracts and receivables, and liabilities like debts and legal obligations.

A share sale is generally more straightforward legal and procedural than an asset sale. The only requirements are transferring shares and updating the corporation’s records to reflect the new ownership. It doesn’t require the individual transfer of each asset or the renegotiation of contracts and agreements, which can be time-consuming in asset sales.

However, share sales come with their own set of challenges and risks, primarily related to liabilities. Since the corporate entity remains the same, any existing or potential liabilities, such as debts, legal disputes, or contingent liabilities, are transferred to the buyer. Therefore, due diligence becomes a crucial aspect of share sales, and the buyer must thoroughly investigate the company’s legal and financial health to understand the scope of what they are acquiring.

From a tax perspective, a share sale can be more advantageous for the seller, benefiting from capital gains treatment and potential tax planning opportunities such as the Lifetime Capital Gains Exemption in Canada.

Share Sale Pros and Cons from Buyer’s Perspective

Pros:

1. Simplicity of Process: A share sale involves a simpler transfer process – buying the shares means acquiring the company as a whole, including all assets and liabilities.
2. Continuity of Business: The business continues to operate uninterrupted, maintaining its contractual relationships, customer base, and workforce.
3. Potential Tax Advantages: In some jurisdictions, buyers may benefit from tax attributes of the acquired company, like carry-forward losses.

Cons:

1. Assumption of All Liabilities: The buyer inherits all of the company’s liabilities, including potentially unknown or undisclosed liabilities.
2. Due Diligence Complexity: Comprehensive due diligence is required to understand all aspects of the company, including financial, legal, and operational risks.
3. Potential for Shareholder Issues: In some cases, there may be complications related to existing shareholders, such as minority shareholder disputes.

Asset Sale

An asset sale is a business transaction where the purchaser acquires specific company assets instead of purchasing the company’s shares. This method involves directly transferring ownership of the company’s assets, including tangible assets like equipment, inventory, and real estate, as well as intangible assets like patents, trademarks, and customer lists. In an asset sale, the selling company retains ownership of the legal entity while the buyer acquires individual business components. One of the main advantages of an asset sale is that the buyer can be selective about which assets to acquire and which liabilities to assume. This selectivity can be particularly beneficial for buyers who want to avoid inheriting the company’s existing debts or legal problems.

From a legal perspective, an asset sale can be more complex than a share sale because each asset must be transferred individually. This process often requires separate agreements for different types of assets. Sometimes, third-party consents or approvals may be necessary, such as when transferring leases or specific contracts. An asset sale may have different tax implications for the seller than a share sale, often resulting in a higher tax liability due to the potential recapture of depreciation on sold assets and capital gains on individual assets. However, buyers generally prefer asset sales because they can specifically choose which assets and liabilities they want to take on. They can often get a step-up in tax basis on the acquired assets, potentially leading to future tax benefits.

Therefore, an asset sale requires careful consideration and negotiation to ensure that the agreement specifies which assets are being sold, the terms of their transfer, and how liabilities are to be handled.

When considering acquiring a business, buyers often weigh the pros and cons of asset and share sales. Each approach has its own advantages and disadvantages from a buyer’s perspective.

Asset Sale Pros and Cons from Buyer’s Perspective

Pros:

1. Selective Acquisition: Buyers can choose specific assets and liabilities they want to acquire, avoiding undesired components and associated risks.
2. Reduced Liability Risk: Generally, an asset sale limits the buyer’s exposure to the seller’s past liabilities, as only those explicitly assumed are transferred.
3. Depreciation Benefits: Buyers can potentially benefit from a step-up in the tax basis of the acquired assets, leading to enhanced depreciation deductions and future tax savings.
4. Flexibility in Restructuring: Post-acquisition, the buyer has more flexibility to restructure or integrate the assets into existing operations.

Cons:

1. Complexity and Cost: Transferring individual assets can be complex and costly, often requiring separate negotiations and legal documentation.
2. Potential for Third-Party Issues: Some asset transfers may require third-party consents (e.g., leases, contracts), complicating the transaction.
3. Operational Challenges: If not all essential assets are acquired, integration of the acquired assets into the buyer’s existing business may face operational challenges.

Summary

Buyers face a choice between asset and share sales in business acquisitions. Asset sales offer selective acquisition and reduced liability risks but involve complex transfer processes and potential tax implications. Share sales provide a more straightforward process but require comprehensive due diligence and navigating regulatory approvals. Buyers need to consider operational needs, risk management, and financial implications to align with their strategic goals.

If you need a Toronto corporate lawyer, contact us today and find out how we can help with your asset purchase and sale transaction.

The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.