The benefits of seeking legal advice before selling your business
If you are thinking about buying or selling a business, you undoubtedly have questioned whether you should structure that purchase or sale as a share purchase or asset purchase transaction.
For various income tax reasons, a seller generally prefers to sell shares while a purchaser prefers to buy assets. The parties’ contrasting reasons for that preference are due, in large part, to the tax consequences flowing to each, depending on how the transaction is structured.
In a share purchase transaction, the only assets are the shares themselves. By virtue of acquiring the shares, the purchaser has also acquired the assets of the corporation and liabilities, both unknown and known. A purchaser would step into the shoes of the shareholder, and in many small to mid-sized businesses, the shoes of an officer and director and continue operating the business without interruption while the seller will no longer have a continuing interest in the corporation’s assets, liabilities, or operations.
In an asset purchase transaction, the assets of a business are sold, but the ownership of the selling corporation, board of directors and officers, remains the same. Liabilities are excluded from the purchase of the business in this transaction unless the parties agree otherwise. Assets may be both tangible (land, equipment, cash, inventory, etc.) and intangible (name, goodwill, copyrights, etc.).
As a seller, a sale of assets is your only option if your business is not incorporated (if you run a sole proprietorship or partnership).
Which type of sale is better for your business?
As mentioned above, typically sellers prefer share purchase transactions and purchasers prefer asset purchase transactions. The reason for this is largely tax-related.
There are immediate tax concerns for a seller in the year of the sale whereas the purchaser is more concerned with tax in the years following the year of the sale.
Generally, a seller will want to sell the shares of the corporation to avoid being left with unwanted assets or liabilities and to take advantage of the lifetime capital gains exemption. As of 2018, this means that up to $848,252 of the purchase price arising on the sale of a qualified small business corporation may be tax exempt.
If a seller were to sell the assets of the corporation, the income would be taxable and no exemption would apply. While there may be tax deferral and planning opportunities if proceeds are maintained in a corporation, many sellers find the share purchase transaction far more appealing.
A purchaser will want to purchase assets to avoid acquiring unwanted assets and unknown liabilities and to obtain depreciable assets.
The purchaser may then be entitled to take tax deductions against income in future years for amounts representing the capital cost allowance on depreciable assets (i.e. the purchaser can deduct the cost of the assets over a period of several years) and the cost of inventory sold associated with the allocation of the purchase price to the appropriate asset.
If a purchaser purchases shares, as opposed to assets, the full purchase price is added to the purchaser’s adjusted cost base for the purchased shares. Shares are not depreciable and therefore provide no tax relief in future years.
As is apparent, there are competing interests involved when determining how to structure the purchase and sale of a business and while the above represents the typical scenario, there are circumstances that will result in a seller wanting an asset purchase transaction and a purchaser wanting a share purchase transaction.
Ultimately, consulting a corporate lawyer, in conjunction with the appropriate tax advice, will enable you to make the best decision for your situation and needs.