Buying or Selling a Business? Understanding Asset Shares vs. Share Sales

Are you considering the sale of your business? Or perhaps you are planning on purchasing a business and starting your own adventure. Either way, this article will help outline some things you should know about the process.

The Basics: Asset Sale vs. Share Sale

When it comes to selling your business, understanding the two primary transaction types is essential.

In an asset sale, you’re selling the company’s individual assets and liabilities. Think of this as liquidating the parts of a business. This may include:

• Equipment like machinery or computers

• Inventory that can be easily quantified

• Real estate that may be tied to the operations

• Intangible assets such as patents, trademarks, and existing client lists

  
  

Conversely, in a share sale, you sell the ownership stake in the business itself. This means the buyer acquires not just your assets but also your company's liabilities. It’s akin to handing over the keys to your entire operation. The buyer has purchased the entire business. In many cases, the business name doesn't even change.

Here's another way to think about it.

• If Company A buys all the assets of Company B, both companies still exist (from a legal standpoint). Company B will likely close its operation, but in a separate transaction.

  
  

• If Company A buys the shares of Company B, then Company B will continue to operate but Company B is now legally owned by Company A.

Recognizing these distinctions forms the foundation for deeper insights into each option.

Financing Options

The financing landscape can dramatically influence how a sale unfolds.

In an asset sale, buyers often find it easier to secure funding. Lenders typically feel more at ease granting loans against tangible assets. For instance, if a buyer is keen on purchasing your company's specialized equipment valued at $300,000, the lender can assess the asset’s worth straightforwardly.

Conversely, share sales can prove more difficult. Buyers may dive deeper into due diligence to uncover any hidden liabilities. This extra caution can lead to lenders requiring larger down payments or imposing stricter financing terms.

Understanding these financing dynamics can help you navigate conversations with potential buyers and their financiers.

Tax Breaks for CCPCs

The tax landscape can heavily influence the decision between asset shares and share sales.

For share sales, CCPCs can utilize the Lifetime Capital Gains Exemption (LCGE) to their advantage, allowing for a capital gains elimination of up to $1.25M (as of 2024) on qualifying sales. This means that if you sell your shares for $1.5 million, you might only pay taxes on $250,000 depending on your adjusted cost basis. This is a massive tax savings to the shareholder.

Conversely, asset sales can lead to immediate tax implications. When you sell business assets, any profits are typically taxed as regular income. For instance, if you sell your equipment and earn a profit of $100,000, you would face taxation at your standard corporate tax rate. If your intention is to close the business, you would need to compensate yourself to access the profits, which would trigger personal taxes. This is not ideal, when compared to shielding your profits on the sale by using the LCGE from a share sale.

Motivations of Buyers and Sellers

Obviously, it would be foolish to make blanket statements about what buyers and sellers will want in every scenario. However, my thoughts, from a small-medium business perspective, are the following:

In general, a buyer will prefer an asset sale, because they are not subject to any hidden or undisclosed liabilities that may be present in the seller's company. Further, the financing options are usually better for an asset purchase.

Conversely, a seller will likely prefer a share sale, because they can tap into the LCGE and shield their profits from income tax. They will also be cut free from any liabilities that pertain to the company. Essentially, when that business changes hands, it is no longer their problem.

Again, there could be many cases where buyer would prefer a share sale, particularly if they are purchasing a brand, or if financing is not an issue, or if they have an existing corporation that would absorb the new corporation. And further, if the seller has already used up their LCGE from other past sales, they won't be as motivated to exercise a share sale for the tax benefits.

Conclusion

Weighing the options of asset sales versus share sales is a thoughtful and often complex decision for CCPC owners. I highly recommend working with an experienced accountant AND lawyer when deciding on buying or selling a business in Canada, and making sure you have the proper advice before signing the dotted line.