Asset Sale vs Share Purchase: A Comprehensive Beginners Guide to Business Acquisitions
Deciding to buy or sell a business (or a part of it) requires careful planning. Generally, the owners or investors can choose between selling or buying the company’s assets or shares.
In this article, we’ll explain the differences between an asset sale and a share sale. We’ll discuss what they mean for the buy-side and sell-side, their disadvantages and advantages, and share some practical tips when dealing with these transactions.
The context of this article will be geared towards buying or selling a small business. When we refer to a “share sale” we mean purchasing the entirety of a privately held, small business.
What Is an Asset Sale?
Assets hold economic value and are expected to provide benefits or revenue in the future.
Most assets are accounted for in the company’s balance sheet and classified into four types: current, fixed, financial investments, and intangibles.
Some examples of assets are cash, operational equipment, buildings, raw materials, intellectual property, customer lists, contracts, licenses, or brand value.
An asset sale refers to the selling or acquiring of these business resources. Liabilities, including debts, lawsuits, mortgages, and other commitments, may be included in the transaction.
The seller will transfer all or some of their collective business assets to a buyer. The seller, however, will remain the legal owner of the entity.
There are plenty of scenarios where selling your company’s assets might be the most favorable approach.
For instance, a company might sell less important assets or those that don’t perform well in its operations. Converting these resources to cash may help the owner focus on more worthwhile endeavors. In the case of a small business, if their net income is minimal they may chose to wind the business down and simply sell the assets.
Other times a company may sell their assets to address cash flow issues and bolster financial stability.
Asset Sale Advantages - Sellers Perspective
Selling your company’s assets brings several financial and business advantages to the table. Here are some of the benefits of an asset sale as the seller:
As the owner, you’re free to decide which assets to put up on sale and set the prices as desired.
The transaction may incur a terminal loss and help offset your business income. You can use the proceeds to support your operations or pay outstanding debts.
This type of sale allows you to generate income while remaining in legal control of your business. You may retain some of your liabilities, which can be advantageous during the payment and settlement.
Selling assets may help preserve your personal properties. Selling company resources can be your way out or even utilize the profit to finance new business ventures.
Asset Sale Disadvantages - Sellers Perspective
Here are some of the potential disadvantages of selling assets:
Compared to a share sale, selling assets can result in higher taxation.
Asset sales involve valuing every asset and liability included in the deal. This step can be time-consuming and costly for both parties, on top of other potential delays from contract reassignments, lease transfers, and more.
Following an asset sale, you’ll still be responsible for continuing your business without the transferred resources. You’ll remain accountable for any outstanding debts and liabilities the buyer refused to acquire.
Lastly, selling assets can potentially create CCA recapture, which you then must include as income. You may also lose some tax benefits available via lifetime capital gains exemption.
Asset Purchase Advantages - Buyers Perspective
If you’re considering purchasing assets for your company, here are some benefits and perks you may obtain:
You may be able to lower your tax basis by stepping up the assets’ basis over their tax values to get deductions for depreciations and amortizations.
The buyer can decide which liabilities, if any, to assume. This rule protects you from inheriting large, unknown, or unstated liabilities from the seller.
Buyers typically expend less resources. Protected from unknown liabilities and debts, you’ll save time and money conducting due diligence.
You’re not obliged to purchase assets that don’t serve you any purpose. That means you can avoid spending on resources that don’t generate revenue in the long run.
As the buyer, you’re free to select which employees to keep. You can retain or terminate contracts as desired without affecting the unemployment rate.
Asset buyers can amortize goodwill for up to 15 years for tax purposes. In contrast, share buyers won’t be able to deduct goodwill until they sell their shares.
Asset Purchase Disadvantages - Buyers Perspective
The following are the advantages of asset sales as the buyer:
Purchasing assets can take longer to close. As multiple assets will need careful negotiations and to be reassigned, the entire process can be lengthy and time-consuming.
The business will essentially restart from scratch. So, you must renegotiate contracts with suppliers, key employees, and customers.
The seller may demand a higher asset purchase price to account for tax costs. In most cases, the assignable contracts will be limited as well.
What Is a Share Sale?
A share, also known as equity, refers to a unit of ownership interest in the business. For the context of this article we’ll look at the benefits of a share sale as it relates to an entire small business.
When a company is bought or sold through a Share Sale the buyer purchases the entire legal company.
Share Sale Advantages - Sellers Perspective
Tax Efficiency: Lifetime Capital Gains Exemption (LCGE): Sellers may qualify for the Lifetime Capital Gains Exemption, which can exempt a significant portion of the capital gains from taxation when selling shares of a Qualified Small Business Corporation (QSBC).
Simpler Transition: Continuity of Business Operations: There is often less disruption to daily operations. Contracts, permits, and employee agreements typically remain intact.
Potential for Higher Sale Price: Intangible Value: Buyers may be willing to pay a premium for the existing business structure, including customer relationships, brand reputation, and operational processes.
Reduced Liabilities: Limited Responsibility for Future Claims: Post-sale, the seller may not be responsible for any future claims against the company, as these would typically be assumed by the buyer along with the shares.
Share Sale Disadvantages - Sellers Perspective
Liability for Representations and Warranties: The seller may still be liable for any breaches of representations and warranties made during the sale, which can result in future claims and financial obligations.
Complexity of Transaction: Share sales can be complex and require extensive negotiation, legal review, and due diligence, which can be time-consuming and costly.
Employee and Shareholder Approval: The sale may require approval from other shareholders and key employees, which can complicate and delay the transaction.
Share Purchase Advantages - Buyers Perspective
Business Continuity: Seamless Operation: Buyers acquire a fully functioning business with existing employees, clients, and contracts, minimizing the disruption that might occur with an asset sale.
Simplified Integration: Retention of Licenses and Permits: Since the business entity remains the same, there is no need to reapply for business licenses, permits, or other regulatory approvals, which can save time and administrative costs.
Tax Benefits: The buyer can benefit from the company's existing tax attributes, such as loss carryforwards, which can reduce taxable income in future years.
Goodwill and Intangible Assets: Brand and Customer Loyalty: Acquiring the shares includes all of the business’s intangible assets, such as goodwill, intellectual property, and customer loyalty, which can be valuable for sustaining and growing the business.
Share Purchase Disadvantages - Buyers Perspective
Assumption of Liabilities: The buyer assumes all existing liabilities of the business, including potential undisclosed liabilities, legal claims, and debts, which can pose significant risks.
Complexity in Due Diligence: Conducting thorough due diligence to uncover all potential issues can be complex and resource-intensive, requiring the involvement of legal, financial, and business experts.
Potential for Hidden Problems: There may be hidden problems such as contingent liabilities, ongoing litigation, or regulatory non-compliance that are not immediately apparent during due diligence.
Differences Between an Asset and Share Sale
Here’s a breakdown of the main differences between asset and share sale
Tax Implications
Asset sales provide better company structure support than share transactions. However, in terms of taxation, the asset deals are typically disadvantaged in a transaction.
This happens because physical assets generate ordinary income tax rates. Intangible assets like goodwill will come with a capital gains rate.
On the other hand, share sales usually incur lower capital gains taxes. In some cases, equity transactions may even qualify for massive tax deductions or exemptions such as the Lifetime Capital Gains Exemption in Canada.
Liabilities
The buyer in an asset sale tends to benefit from reduced liabilities. That’s because they can handpick the assets they want and avoid liabilities for the seller to handle.
If you want to transfer assets and liabilities in one deal as a seller, you can opt for a share instead of an asset sale.
Liabilities inherited from buying shares may include outstanding debts, loans, unpaid wages, or lawsuits. These commitments will carry over to the new owner and won’t disappear after the acquisition.
Adding a security clause, such as an indemnification clause, in the agreement offers some form of security. But if you’re the buyer, you could wind up in court to address these costs.
Cost & Complexities
Share transactions typically cost more than asset acquisitions because you purchase all outstanding shares rather than individual assets to obtain controlling interest.
Legal & Accounting Issues
Asset sales aren’t limited to certain company types. So, you can sell assets across all your business structures without legal issues. However, the same can’t be said for equity or share deals.
Final Thoughts: Taking Legal Advice
Whether you’re selling or buying a companies assets or all of their shares both demand extensive research on business law and tax policies.
Sellers need to determine their business’s value before looking for a buyer. Investors and buyers will want the right asset or shares, carry out due diligence, and account for their limited funds.
All these can sound complicated for an untrained ear, which is where Parr Business can help. Talk to our experts and we’ll walk you through every step of the way.
