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Selling Shares versus Assets...What is the difference?

When a business owner decides to sell his or her company, it is usually after considerable deliberation, over a long period of time.  Once this monumental decision has been made, many factors come into play, not the least important of which is how the sale will be structured.  There are two different ways that business sale transactions occur.  The first is to sell the assets of the business, and the other is to sell the shares of the business.  While the end result is the same, that a buyer will ultimately own and operate your business, the form or structure of each type of transaction is very different.  Usually sellers prefer share deals, and buyers tend to prefer asset transactions.  Why is that? How do deals ever get done? 

  • The reason why each party prefers a different form of transaction is simply because there are distinct advantages to have it structured in their preferred form.  A seller, if an individual, will typically prefer to sell shares of the corporation, as the tax implications are considerably better than for an asset sale.  When you sell your business, it is not the sale price that matters but rather the amount of money left in your pocket after Revenue Canada collects its share.  When you sell the shares of your company, if you are a Canadian resident, own a Canadian small business corporation and use substantially all of your assets (90% at the time of sale and 50% for the past 2 years) actively in your business then your shares may qualify for the small business capital gains exemption.  What this means is that the first $750,000 of capital gains (was $500K prior to March 2007) will be tax-free!  This is a phenomenal benefit.  This exemption is not available for corporate shareholders.  To qualify for the capital gains exemption, you or an immediate family member must have owned the shares for the past 2 years.  The balance of any capital gains will be taxed at a lower rate because only 50% (used to be 75% then 66%) of the capital gains get included in income. 

  • Buyers prefer to buy assets for a few main reasons.  The first is liability.  Once the shares of a corporation are purchased, the new owner becomes responsible for any liability that may arise against the corporation, whether it was before or after they purchased the shares.  The Buyer will likely protect themselves against liability that arise when the company operated under the Seller’s watch (by getting personal representations and warrants), but the Buyer still must sue the Seller for the damages if the Seller does not pay because the third party will sue the corporation, which the Buyer now owns.   The second reason that Buyers want to purchase assets is because they are able to step-up the value of assets to their fair value from their book value, and then take depreciation write-offs against any future income earned.  This is different from a share purchase where the Buyer inherits a low basis for depreciation.  Also, if there is an excess of purchase price over the fair value of the net assets acquired, then goodwill is created which can also be written off over time.  There is no business write-off available in a share transaction.  Lastly, the Buyer can selectively purchase only the assets they want, leaving behind anything deemed undesirable, for whatever reason.

  • With such a difference in opinions, how do deals ever get done?  The main reason is because both parties have an interest in doing so, even if certain compromises have to be made. The Buyer may want to buy the company because of the market they are in or their customer base, and can be convinced to buy shares.  The Seller can often command a higher price in an asset deal, and thus may be convinced to sell assets if it means getting more for their company than they expected.  Ideally there will be more than one buyer vying for the seller’s business, and in such a competitive atmosphere, the motivated buyer will put aside the desire to only purchase assets.  Employing an expert intermediary to negotiate on your behalf will ensure that whether an asset or share deal is consummated, nothing will be left on the table.

  • In summary, sellers usually want to sell shares and buyers usually want to buy assets.  If both parties want to do a deal, they will come to some negotiated agreement regarding what form the transaction will take. Regardless of the negotiated sale structure, the outcome is the same. At the end of the process, the Buyer purchases the business from the seller, and after the closing date, becomes responsible for operating the business.  Progressing from step one of the process, deciding to sell, to the closing day and beyond, can be a lengthy, emotional and arduous process. Do your homework, and obtain expert assistance if at all possible.  Rhonda Downey is the President of Regelle Partners Inc. , a mergers and acquisition firm with a niche focus in the Canadian Security Industry.  We specialize in helping business owners sell their companies by initiating and managing the business sale transaction.