Asset Sale vs. Share Sale: Which Is Best for Your Business?
If you are preparing to sell an incorporated business, one decision that may arise is whether the transaction will be structured as an asset sale or a share sale. The difference can affect taxes, liabilities, contracts, employees, financing and ultimately how much value you keep after the sale.
At Top Shelf Franchising, we see deal structure as part of the bigger picture when helping owners
sell their business. There is no single structure that is automatically best for every seller.
What Is the Difference Between an Asset Sale and a Share Sale?
In an asset sale, the buyer purchases specific assets from the company. Depending on the deal, those assets might include equipment, inventory, customer lists, intellectual property, goodwill or other parts of the operation.
In a share sale, the buyer purchases the corporation's shares. The corporation continues to own its assets and generally remains responsible for its existing obligations. That distinction is important because the buyer and seller can have very different preferences.
Why Might a Seller Prefer a Share Sale?
For many incorporated business owners, a share sale can be attractive because corporate ownership can change without selling each underlying asset individually. There may also be important tax advantages in some situations. Canadian owners who sell shares that qualify as qualified small business corporation shares may be eligible for the lifetime capital gains deduction, subject to the applicable rules and the seller's individual circumstances. A share sale may also simplify the transfer of certain assets and business relationships because the corporation itself continues to exist. However, that does not mean every seller will qualify for the same tax treatment or that a share sale will always produce the better result.
Why Might a Buyer Prefer an Asset Sale?
Buyers may prefer an asset purchase because it allows them to be more selective about what they acquire. They may want the equipment, inventory, brand and customer relationships without taking on every historical liability associated with the existing corporation.
An asset purchase can also establish new tax values for acquired assets based on the purchase-price allocation. The Canada Revenue Agency notes that the purchase price may need to be allocated among individual assets, inventory and goodwill. For the seller, however, selling assets can create different tax consequences depending on what is being sold. There may be capital gains, income inclusions, or recapture of previously claimed capital cost allowance.
Liabilities Can Affect the Structure
One of the biggest differences between the two structures is how existing liabilities are handled. In a share sale, the buyer is acquiring the corporation, including its history. That can make buyers more cautious about taxes, contracts, lawsuits, employee obligations or other potential liabilities.
As a result, buyers considering a share purchase may conduct more extensive due diligence or negotiate representations, warranties and indemnities into the sale agreement. With an asset transaction, the buyer may have more ability to define exactly which assets and obligations are included, although the legal treatment of individual liabilities still depends on the transaction.
What About GST/HST?
Tax treatment can also differ depending on how the deal is structured. The CRA states that purchases of corporate shares are generally not subject to GST/HST. Asset sales can involve GST/HST, although qualifying buyers and sellers may sometimes make a joint election when all or substantially all of the property required to operate the business is being transferred. This is one reason the tax structure should be reviewed before the purchase agreement is finalized.
So, Which Is Better: An Asset Sale or Share Sale?
From a seller's perspective, a share sale may be attractive when it offers favourable tax treatment and enables a cleaner transfer of ownership. A buyer, on the other hand, may favour an asset sale because it can offer greater control over what is being purchased and which risks are being assumed.
The final structure is often negotiated by the parties. Price matters, but so do the tax consequences, liabilities being transferred, working capital, inventory, contracts, payment terms and what you actually receive after the transaction closes. That is why it is important to involve your accountant and lawyer when comparing specific structures.
If you are thinking about
selling your business, Top Shelf Franchising can help you understand your valuation, buyer interest and potential deal structure before you enter negotiations. Having those pieces clear early can make it easier to evaluate an offer based on the full transaction rather than the purchase price alone.
