Sellers tend to prefer Share sales while Buyers lean toward Asset sales. Here are five things to consider when making this quite important decision. Outside Professional services will be required for legal, tax and possibly other questions. Make sure your trusted Advisors have specific business selling experience.
1. Avoiding Liability Issues
In a Share sale, all of the assets and liabilities of the Sellers' business remain with the company. Subject to agreed price adjustments or indemnifications the Seller gets to leave responsibility behind them from any liabilities and the Buyer agrees to take on the responsibilities.
An Asset sale allows the Buyer to carefully select which assets they want to purchase and which liabilities will be assumed. In addition, and by law, the Buyer becomes liable for environmental contamination issues and any union employees.
2. Union and Non-Union Employees
In an Asset sale, non-union employees do not need to be taken on by the Buyer. To avoid wrongful dismissal claims from the employees, the Seller usually will require a Buyer to offer new contracts to most if not all employees on terms that are similar or identical to their existing contracts including a recognition of prior service.
In a Share sale, the Sellers' employees remain employed by the company, unless a change of ownership triggers rights under the employment agreements of specific employees such as senior executives. Therefore, unless the Seller terminates certain employees and pays severance pay before closing, the Seller retains all of the employees, even those the Buyer doesn't wish to employ.
3. Reduced Level of Complexity
Share sales are usually less complex than Asset sales. An Asset sale will require transfer documentation for all of the assets being transferred including real property, permits, licences, leases, contracts, equipment and vehicles, intellectual property, etc.
By contrast, under a Share sale, all of the assets of the Sellers' business remain with the company. The only required transfer is of the shares of the company itself and possibly an assignment of shareholder loans.
Be aware, an Asset sale may possibly trigger the need to obtain more third party consents to the transfer of the assets. A more time consuming and expensive process than a Share sale, where identifying and dealing with any change of control provisions in contracts, leases, licences and permits would be less of a burden. In addition, certain assets, such as government licences and permits, may not be assignable.
4. Tax Considerations – Share Sale (Please check with your trusted Advisors for tax and other appropriate laws within your own province/state/country.)
The proceeds of a Share sale (above the Seller’s adjusted cost base) are taxed as capital gains, meaning only 50% is included as income.
If certain conditions are met, a $883,384 lifetime capital gains exemption indexed to inflation is available to Canadian residents who sell shares of a qualified small business corporation. This applies to a sale in the year 2020 and could change in the future.
A corporate Seller may be able to reduce its taxable gain by causing their company to pay a non-taxable inter-company dividend from “safe income” (that portion of retained earnings attributable to earnings reported for income tax purposes) before the sale. The purchase price will be reduced accordingly.
A Buyer might prefer a Share transaction in order to take advantage of the Sellers company’s non-capital tax-loss carryforwards (i.e. business losses) that can be applied against future income.
A Share purchase allows a Buyer to avoid paying sales and property transfer taxes on purchased assets. These taxes can be significant – property transfer tax is 1% on the first $200,000 in value of the real estate and 2% thereafter. Sales tax is 7%, although an exemption may be available in respect of certain assets such as production machinery and equipment. (Please check your local and national laws with a professional.)
5. Tax Considerations – Asset Sale (Please check with your trusted Advisors for tax and other appropriate laws within your own province/state/country.)
A Seller will usually desire the purchase price to be allocated to minimize the recapture of capital cost allowance previously deducted on depreciable property.
A Buyer will typically want to allocate as much of the purchase price as possible to depreciable property so that it can ‘step up’ the value of assets to their fair value resulting in higher tax deductions for depreciation expenses in the future.
Lastly, a Buyer will be required to pay property transfer tax on real property and buildings (including permanently affixed equipment) and sales tax on equipment and inventory subject to all available exemptions.
You need to determine (with appropriate counsel) advantages and disadvantages of Asset vs Share sale for you.
Exercise - Tasks And Questions
Outside Professional services will be required for legal, tax and possibly other questions. Make sure your trusted Advisors have specific business selling experience. Start interviewing current and potential professional services Advisors. Make a list of candidates.
Asset Sale Advantages To Me
Asset Sale Disadvantages To Me
Share sale Advantages To Me
Share Sale Disadvantages To Me
Disclaimer: We are not legal or financial advisors and make no claims about the accuracy of our opinions. Please make sure you work with your trusted Advisors to determine tax and legal implications of an Asset vs Share sale in your country.