What’s the difference between an asset purchase and a sale purchase? Is it better to buy assets or shares? If you’re buying or selling a business, which is right for you? There are advantages and disadvantages of both an asset purchase and a sale purchase, and the option you choose can significantly impact your business in various ways.
What’s The Difference Between An Asset Sale And A Share Sale?
Both an asset sale and a share sale are a purchase of the entire business, but there are legal differences between the two.
What Is An Asset Sale?
An asset sale involves the individual sale of the business’s assets. Assets include everything that make up the business, both tangible and intangible, such as:
- customer lists,
- supplier lists,
- accounts (receivable and payable),
- trade names,
- emails and phone numbers,
- intellectual property, and
The purchaser must ensure that every asset they want is explicitly listed in the purchase agreement.
An asset sale is more complex than a share sale, but it allows the purchaser to pick and choose the components of the business they want and to avoid undesirable assets like debt and liabilities. For example, a purchaser may desire the business name, inventory, and customer lists, but because of plans to set up shop at a different location and use different suppliers, they don’t need to buy the property or supplier lists.
What Is a Share Sale?
A share sale involves the purchase of ownership of a corporation. The purchaser buys the company shares and takes over complete ownership and control of the business. They become the new shareholder. This type of sale is only applicable if the corporation is incorporated.
Due diligence is crucial for the purchaser in a share sale because all assets, liabilities, and obligations of the company are transferred to the new owner. This includes taxes owed and outstanding debt.
Asset Sale vs Share Sale: What to Consider
How do you decide if an asset sale or a share sale is right for you? There are various things to consider, including the type of business, tax implications, and potential liabilities.
Is An Asset Sale Right For You?
If the business is not incorporated (such as a sole proprietorship or a partnership), an asset sale is automatically your only option. However, you can still choose an asset sale for an incorporated company.
As a buyer, an asset sale is advantageous because it allows you to purchase only the parts of the business you want. You’re not obligated to take on the liabilities of the company, nor are employment contracts automatically assigned to you.
It’s important to consider the undepreciated capital costs (UCC) of the assets. The UCC is the current value of depreciable assets recorded on the corporation’s tax return after the depreciation deductions. For the buyer, a higher UCC means higher future deductions. But for a seller, a higher UCC can mean higher capital gains tax.
Is a Share Sale Right For You?
A share sale is typically much simpler than an asset sale because it’s a complete transfer of the entire business, not the individual parts of the business.
Sellers usually prefer share sales because it eliminates the risk of being left with unwanted assets and liabilities. They also receive the benefit of the Lifetime Capital Gains Exemption available under the Income Tax Act.
If the undepreciated capital costs (UCC) of the company’s assets are nearly nonexistent, or if the fair market value of the assets are less than the company’s tax costs, a share sale is better for the buyer.
Do This Before You Sign an Asset Deal or Share Deal
If you’re buying or selling a business, there are pros and cons to both an asset deal and a share deal. Consider the potential liability and tax implications of each option and perform due diligence. Protect your investment by choosing the right type of business deal.
Generally, purchasers prefer asset deals and sellers prefer share deals, but there are many exceptions to this. Every situation is unique, and your motivations can change the typical preferences. Always talk to a business lawyer and your accountant before signing any documentation for a business sale or purchase!
The business lawyers at Getz Collins and Associates offer practical legal advice to help you navigate buying and selling a business. Contact us today for legal advice about asset deals and share deals.