BUYING OR SELLING A BUSINESS -SALE OF SHARES VS ASSETS – By Rick Sidhu, CPA, CGA

SALE OF SHARES

Rather than selling the individual assets that your company owns, you can choose to sell your corporate shares. Seller’s perspective-

Sellers often prefer selling the shares of the company as opposed to the assets for the following reasons:

  • Taxes: Only half of the company’s capital gains is considered taxable income. The other half of the gains can be included in income free of tax. In addition, some Canadian residents who sell the shares of their small business may qualify for a lifetime capital gains exemption of $848,252 in 2018. Comparatively, in an asset sale, selling the land and building held in a corporation may also trigger the payment of land transfer taxes. If corporate shares are sold instead, the corporation would still own the land and no transfer taxes would apply.
  • Complexity: Transactions within a share sale are less complex than in an asset sale. The only required transfer is the transfer of shares. An asset sale is more complex because it requires more documentation, including transfer papers and third party consent forms. After the assets are sold, the company would also need to be wrapped up, which could add to the existing costs.
  • Liability: With a share sale, all of the assets and liabilities of the target company remain with the company shareholders: this means that the seller gets to walk away from any liabilities, and the buyer takes them on.

Buyer’s perspective: A buyer may prefer purchasing shares when the company has a non-capital tax-loss carry forward that can be applied against future income. Non-capital losses are business losses that arise when expenses exceed income in a given year. The buyer might want to take advantage of the loss carryforward.

SALE OF ASSETS

Instead of selling your company shares, you may decide to hold onto the shares and sell your company assets. In this case, seller still owns the company. An asset purchase requires the sale of individual assets, such as equipment, inventory, real property, contracts, or lease agreements.

Buyer’s Perspective: Buyers often prefer purchasing the assets of the company for the following reasons:

  • Taxes: A buyer will usually want to maximize their tax deductions for depreciation expenses in the future. Maximizing the purchase price of depreciable property bumps the value of the assets up to their fair market value. Since the assets would then have a higher tax value, there are more deductions for capital cost allowance to offset future income. On the other hand, a seller would want to sell the assets below its net book value to minimize the recapture of capital cost allowance previously deducted on depreciable property.
  • Asset selection: An asset sale allows the buyer to cherry-pick which assets to purchase. For example, in an asset sale, non-union employees do not need to be included in the purchase. Further, purchasing assets individually allows the buyer to bump up the tax value of those assets to their current market value.
  • Option to leave liabilities: In an asset sale, the buyer is generally not responsible for the company’s liabilities. This is a significant difference from a share sale, where the company’s liabilities are also included in the transaction. Any lawsuits, tax reassessments or other liabilities that relate to the period before the shares were purchased would be transferred to the buyer.

Seller’s perspective: A seller might want to sell the assets when the company is in need of capital. For instance, if a company has built up significant goodwill, the seller might want to keep the company by retaining corporate shares and sell the assets to raise capital.

Conclusion :Whether you are looking to purchase or sell a company, there is a lot to consider when choosing between an asset or share transaction. While each situation needs to be evaluated based on the specific assets involved, generally a seller will want to sell shares and a buyer will want to buy assets. Unique circumstances and desired outcomes may result in a change of preferences. It is important to consider potential liabilities and tax implications before making a decision. Consult a Chartered Professional Accountant to determine the best strategy for your needs.