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