When it comes to selling or buying a business, one of the most important decisions is how to structure the deal. There are two main options: an asset sale or a share sale. Each option has its own advantages and disadvantages, depending on the perspective of the seller and the buyer, as well as the nature and condition of the business. In this blog post, we will explain the difference between an asset sale and a share sale, and highlight some of the key factors to consider when choosing the best option for your M&A transaction.
What is an Asset Sale?
An asset sale is a transaction where the seller sells some or all of the assets used in the business to the buyer. The assets can include tangible assets (such as equipment, inventory, and property) and intangible assets (such as customer lists, trademarks, and goodwill). The buyer can choose which assets to acquire and which liabilities to assume from the seller. The seller retains the ownership of the entity (such as a corporation or an LLC) that holds the assets, and is responsible for any liabilities that are not transferred to the buyer.
What is a Share Sale?
A share sale is a transaction where the seller sells the equity interests (such as shares or units) in the entity that owns the business to the buyer. The buyer acquires the entire business, including all of its assets and liabilities, by becoming the new owner of the entity. The seller transfers the ownership of the entity to the buyer, and has no further involvement or obligation in the business.
The buyer acquires the entire business, including all of its assets and liabilities, by becoming the new owner of the entity.
Pros and Cons of Asset Sale vs. Share Sale
The choice between an asset sale and a share sale depends on various factors, such as the tax implications, the legal risks, the operational efficiency, and the negotiation power of the parties. Here are some of the general pros and cons of each option:
Pros For The Buyer
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The buyer can select the assets and liabilities that it wants to acquire, and avoid any unwanted or unknown liabilities of the seller.
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The buyer can depreciate the acquired assets based on their fair market value, which may result in tax savings.
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The buyer can avoid any legal issues or disputes that may affect the seller or the entity, such as lawsuits, claims, or regulatory violations.
Cons For The Buyer
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The buyer may have to pay higher taxes on the purchase price, as some assets may be subject to sales tax, GST/HST, or other taxes.
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The buyer may have to obtain the consent of third parties, such as landlords, lenders, suppliers, or customers, to assign or transfer the contracts or leases related to the assets.
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The buyer may have to reapply for or obtain new licenses, permits, or registrations to operate the business, which may involve additional costs and time.
Pros For The Seller
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The seller can retain some of the assets or liabilities that it does not want to sell, or that may have sentimental or strategic value.
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The seller can benefit from the capital gains exemption, if the assets qualify as qualified small business corporation shares or qualified farm or fishing property.
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The seller can avoid any future liabilities or risks associated with the business, as it is no longer the owner of the entity.
Cons For The Seller
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The seller may have to pay higher taxes on the sale proceeds, as some assets may trigger recapture income or income from depreciable property.
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The seller may have to deal with the winding up or dissolution of the entity, which may involve additional costs and formalities after closing.
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The seller may lose the goodwill or reputation of the business, as the buyer may change the name or the brand of the business.
Pros For The Buyer
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The buyer can acquire the entire business as a going concern, without disrupting the operations or the relationships with the stakeholders.
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The buyer can benefit from the tax attributes of the entity, such as loss carryforwards, tax credits, or tax pools, which may reduce the future tax liability.
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The buyer can avoid any taxes or fees on the transfer of the assets, as the ownership of the assets remains with the entity.
Cons For The Buyer
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The buyer inherits all of the liabilities and risks of the entity, whether known or unknown, which may affect the value or the performance of the business.
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The buyer cannot depreciate the acquired assets based on their fair market value, as the tax basis of the assets remains the same as the seller’s.
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The buyer may face legal challenges or disputes from the minority shareholders or creditors of the entity, who may have dissent or appraisal rights, or may challenge the validity or the fairness of the transaction.
Pros For The Seller
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The seller can sell the entire business in a simple and clean transaction, without having to deal with the valuation or the allocation of the assets and liabilities.
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The seller can benefit from the capital gains exemption, if the shares qualify as qualified small business corporation shares or qualified farm / fishing property.
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The seller can preserve the goodwill or reputation of the business, as the name of the business remains the same.
Cons For The Seller
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The seller may have to provide extensive representations and warranties, and indemnities, to the buyer, to cover any potential liabilities or issues of the entity.
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The seller may have to obtain the consent of third parties, such as lenders, regulators, or shareholders, to sell the shares or to change the control of the entity.
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The seller may have to pay taxes on the sale proceeds, as the shares are generally subject to capital gains tax.
Conclusion
There is no one-size-fits-all answer to the question of whether to choose an asset sale or a share sale for your M&A transaction. Each option has its own pros and cons, and the best option depends on the specific circumstances and objectives of the parties. Therefore, it is advisable to consult with your professional advisors, such as lawyers, accountants, and brokers, to determine the optimal structure for your deal. At our firm, we have the expertise and the experience to help you navigate the complex and dynamic M&A landscape, and to achieve the best possible outcome for your transaction.
“If it says ``one size fits all,`` it doesn't fit anyone.”