There are two basic transaction structures for acquiring a business – (1) the Share Purchase and (2) the Asset Purchase. Many factors must be considered when deciding whether to acquire or sell one’s business using either a share or asset transaction structure.
Generally speaking, sellers prefer to sell shares, while purchasers prefer to buy assets. This is the case for a number of reasons, including the following:
Why a seller may prefer a share sale over an asset sale transaction:
- A share deal eliminates the need for most consents from third parties and there is no need for a separate conveyancing of the assets;
- Employees of the seller continue their employment uninterrupted and the purchaser assumes responsibility for the employment arrangements on a go-forward basis; and
- Tax benefits to the seller – On a share sale, the seller will generally realize a capital gain or loss on the disposition of shares. An asset sale, in contrast, may give rise to recapture or ordinary income from the sale of inventory or eligible capital property, GST and other transfer taxes resulting in an increased compliance burden. If a corporation sells assets there is also a potential for two tiers of taxation, one at the corporate level on the sale of the assets and again at the shareholder level when the proceeds are distributed to the shareholder. Further, the seller’s cost base in the shares may be higher than the corporations’ tax cost in the underlying assets. Where this is the case, the seller will realize a smaller overall tax liability on a sale of shares than on a sale of its assets. In addition, if the shares in question meet the requirements for “qualified small business corporation” shares under the Income Tax Act, the seller may be eligible to offset all or a portion of the capital gain realized on the sale of the shares with the lifetime capital gains exemption, to a maximum of $750,000.
Notwithstanding the foregoing, there may also be a number of reasons why a seller may prefer an asset purchase over a share purchase transaction. For example, a seller may prefer an asset transaction where there is a potential to obtain a higher purchase price for the assets sold as well as the ability to sell only a division of the corporation and the ability to retain assets which may be strategic to the seller but would be discounted by a purchaser who does not consider them strategic.
Why a purchaser may prefer an asset purchase over a sale purchase transaction:
- Employees of the seller are typically terminated en mass at the time of closing and the purchaser hires only those employees that it wishes to retain. If employees are not rehired by the purchaser on substantially identical terms, the seller (not the purchaser) will be liable for all severance and other termination costs for departing employees;
- The purchaser may selectively acquire the assets it wants and deliberately exclude those assets which are not desired; and
- The obligations and liabilities of the seller generally do not transfer to the purchaser under law, unless the purchaser has contracted to assume them.
Notwithstanding the foregoing, there are also a number of reasons why a purchaser may prefer a share purchase versus an asset purchase in some instances. For example, under a share purchase, the purchaser is assured of obtaining all of the assets essential to the business as the property of the corporation is transferred as a whole. In addition, a share deal eliminates the need for the purchaser to pay GST or land transfer taxes on the transaction, which may be required in an asset transaction. Purchasers may also have tax motivations in pursuing an asset transaction.
The above-noted factors are just some of the many one should consider when contemplating the sale or acquisition of a business. It is strongly recommended that you seek out the advice of a knowledgeable and experienced lawyer in this area, who can help you select the proper transaction structure to suit your needs, negotiate the terms of the transaction on your behalf, conduct the necessary due diligence to protect your interests and otherwise guide you through the process.
If you are contemplating the purchase or sale of a business, please contact Stringam and one of our knowledgeable lawyers will assist you.