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Selling shares vs. selling assets . . . what’s 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?
March 28, 2008 By Rhonda Downey
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 per cent at the time of sale and
50 per cent for the past two 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 $500,000
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 two years. The balance of any
capital gains will be taxed at a lower rate because only 50 per cent
(used to be 75 per cent then 66 per cent) 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 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.
They specialize in helping business owners sell their companies by
initiating and managing the business sale transaction. She can be
contacted at 416-572-2110 or rhonda.downey@regelle.com.
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