Buying a Business: Asset Purchase vs. Share Purchase
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There are two core methods to buy or sell a business: an asset purchase or a share purchase. An asset purchase requires the sale of individual assets. A share purchase requires the purchase of 100 percent of the shares of a company, effectively transferring all of the company’s assets and liabilities to the purchaser. Generally, the purchaser will prefer an asset transaction and the vendor will prefer a share transaction. However, this preference could vary based on many factors.
An asset transaction involves the purchase or sale of some or all of a company’s assets, such as equipment, inventory, real property, contracts or lease agreements. An asset transaction is more complex than a share transaction because documentation is required for each asset being transferred. Third party consents may also be required where there will be a change to the control provisions in a contract, lease, licence or permit. Agreements often state that a change in control requires approval of the third party or may result in a forfeiture of the agreement.
Typically, this method is favoured by the purchaser because it allows them to be selective regarding the assets they wish to purchase. For example, a purchaser may only be interested in the inventory and equipment that the company owns and may make an offer to only purchase these desired assets. The vendor may accept the offer or they may decline and only offer to sell all of the assets as a package deal.
A purchaser may also desire an asset transaction because it involves less liability risk. Purchasers are required by law to assume liability for environmental contamination and union employees, regardless of the transaction type. However, in an asset transaction the purchaser is not required to assume liability for non-union employees unless they elect to offer them new contracts. Vendors may sometimes require the purchaser to offer similar or identical contracts to existing employees so that they can avoid wrongful dismissal claims. Additionally, the purchaser can use the purchased assets to create a new company, reducing the risk of unforeseen liabilities that may arise with the current company. Despite the reduced liability, it is vital for the purchaser to conduct the appropriate due diligence searches before completing an asset transaction.
A share transaction is typically completed by the purchase or sale of 100 percent of the company’s shares. This type of transaction is less complex than an asset deal, requiring fewer transfer documents. Documentation is only required for the transfer of the shares and occasionally for the assignment of shareholder loans.
Typically, this method is favoured by the vendor because of the personal income tax benefits. The proceeds of share sales are taxed as capital gains with only 50 percent of the proceeds included as income. There are also certain lifetime income tax exemptions for the sale of shares from qualifying small businesses. This is a significant financial benefit for the vendor. As a result, the vendor may be willing to negotiate a lower price in exchange for the purchaser agreeing to a share transaction.
There may be some tax benefits for the purchaser as well. The purchaser may benefit from non-capital tax loss carryforwards, if the company has accumulated any unused allowable losses, which can be applied against future income the company earns. The purchaser can sometimes avoid paying sales tax on assets such as equipment and inventory and property transfer tax on real property and buildings.
A purchaser may be hesitant to agree to a share deal because the purchaser inherits all of the company’s liability along with its assets. This is risky because liability is often unknown or unforeseeable at the time of the transaction. The purchaser will even inherit all of the employees of the company. There are some measures that a purchaser can take to protect themselves from liability. Purchasers should take the appropriate due diligence precautions by conducting searches and investigations, such as title, tax, zoning and fire searches, before entering into a transaction. Additionally, a purchaser should consider requesting an indemnity agreement or a holdback of the purchase price for a period of time to ensure that they will not be responsible for unforeseen liabilities that arise within a specified time period.
Whether you are looking to purchase or sell a company, there is a lot to consider when choosing between an asset or share transaction. As a purchaser, it is critical to consider potential liability and tax implications and to take steps to protect your investment such as conducting the appropriate due diligence searches. As a vendor it is worthwhile to consider income tax implications and potential employment law liability. While typically purchasers favour an asset transaction and vendors favour a share transaction, unique circumstances and desired outcomes may result in a change of preferences. It is beneficial to consult with a lawyer and explore all of your options before signing any documents.
Please contact Michael Paiva for more information about asset and share transactions, or if you require assistance with a business transaction.