Lawyer for business mergers, acquisitions, divestitures and other transactions.

BUSINESS SELLER: SHARES vs ASSETS

 Business Purchase  -  Letter of Intent  -  Due Diligence  -  Negotiations  -  Asset vs Share  -  Purchase Agreement  -  Closing

Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

When looking to sell your business/company, a critical factor is whether to structure the transaction as an asset purchase or a share purchase. This choice has significant legal, financial, and tax implications, and what is advantageous for the seller is often the opposite for the purchaser [we also look at the operative and resultant distinctions of asset purchase vs share purchase]. Based on an overall assessment of the advantages and disadvantages from the seller's perspective, the preference of most sellers is for a share purchase transaction [for the purchaser's perspective].

Share Sale (from the seller's perspective)

A share sale involves the seller disposing of its shareholding in the company. The legal entity of the business remains the same, with its assets and liabilities staying within the corporation, but the ownership changes.

  • Advantages for the Seller:

    • Favorable Tax Treatment (Capital Gains): Proceeds from the sale of shares are generally taxed as a capital gain. In Canada, only 50% of a capital gain is taxable, which is usually more favourable than the tax treatment in an asset sale.

    • Lifetime Capital Gains Exemption: Canadian-resident individual shareholders selling shares of a Qualified Small Business Corporation may be eligible to use the Lifetime Capital Gains Exemption to shelter a significant amount of the capital gain from tax (over $1 million in 2024, subject to annual indexing). This is a major financial benefit.

    • Simpler Transaction/Cleaner Exit: The ownership of the entire company transfers with the sale of shares. This is administratively simpler as it avoids the individual transfer, assignment, or re-titling of every asset, contract, and license. The seller generally gets a "cleaner break" from the business.

    • Fewer Contractual Issues: Existing contracts, permits, and licenses generally remain with the corporation and do not need third-party consent for assignment or re-negotiation.

  • Disadvantages for the Seller:

    • Extensive Due Diligence: Buyers must conduct very thorough due diligence to uncover all potential or unknown liabilities, which can be intrusive and time-consuming for the seller.

    • Post-Closing Liability Risk (Indemnities): Although the buyer technically assumes all liabilities, the seller is typically required to provide representations, warranties, and indemnities to the buyer to cover pre-closing liabilities, which means the seller may remain financially responsible for certain issues after closing.

    • Potentially Lower Price: Buyers often discount the purchase price in a share sale because they inherit all the company's liabilities (known and unknown) and cannot "step-up" the tax cost of the underlying assets for future depreciation purposes.

Asset Sale (from the seller's perspective)

An asset purchase involves the seller disposing of specific, individual assets of a business (e.g., equipment, inventory, intellectual property, customer lists) rather than the shares of the company itself.

  • Advantages for the Seller:

    • Retention of Unwanted Assets/Liabilities: The selling corporation retains ownership of any assets or liabilities not explicitly sold to the buyer (e.g., specific legal claims or debt the buyer did not want).

    • May Achieve Higher Gross Price (Less Tax-Sensitive to Buyer): Buyers generally prefer asset deals due to tax advantages (e.g., step-up in asset cost for depreciation) and liability protection, and may therefore be willing to offer a higher gross purchase price to the seller.

    • Flexibility to Keep the Corporate Shell: The seller retains the original corporate entity, which may hold leftover cash or assets, and can be used for future ventures or orderly wind-up.

  • Disadvantages for the Seller:

    • Double Taxation Risk: This is the most significant disadvantage. First, the corporation pays tax on the proceeds from the sale of the assets (capital gains on some assets and potentially "recapture" of previously claimed tax depreciation/Capital Cost Allowance). Second, when the remaining after-tax proceeds are distributed to the shareholders (often as a dividend), they are taxed again at the personal level.

    • Inability to Use Lifetime Capital Gains Exemption: As the sale is made by the corporation (not the individual shareholder), the seller cannot use the beneficial Lifetime Capital Gains Exemption.

    • Administrative Complexity: The transaction is more complex. Each individual asset, contract, lease, or license must be individually identified, valued, and legally transferred, often requiring third-party consents.

    • Remaining Corporate Liability: The selling corporation retains all liabilities that the buyer did not specifically agree to assume, requiring the corporation to be maintained and eventually dissolved.

For knowledgeable and experienced legal representation when purchasing a business, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.

 

Purpose of a Share Purchase Agreement. A Share Purchase Agreement is a legally binding contract that outlines the terms and conditions for the sale and transfer of shares in a corporation from its current shareholders (the Vendor) to the Purchaser. The functional purpose of a Share Purchase Agreement includes . . . Read more.

 

10 Key Aspects of an Asset Purchase Agreement. An Asset Purchase Agreement is the contractual document between the purchaser and the vendor that sets out the legal terms and conditions of the transaction of purchase and sale of specific assets of a corporation or business. The following represents 10 key aspects of consideration . . . Read more.

 

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