Asset vs. Share Purchases: Key Considerations for Buyers and Sellers

One of the first decisions in purchasing a business is whether to acquire the company’s assets or its shares. Each avenue has its own unique tax, legal, and financial implications that can significantly impact both the buyer and seller. This article will explore the advantages and disadvantages of each structure to help guide prospective buyers and sellers in choosing the most suitable approach to meet their business objectives.

Purchase and Sale of Assets

An asset sale involves purchasing specific components of a business rather than the entire entity. Buyers can choose which of the company’s assets to acquire, ranging from tangible property like real estate and inventory to intangible assets such as intellectual property, contracts, and goodwill.

Benefits to the buyer

An asset sale can be beneficial to the buyer as the buyer does not need to assume the business’s liabilities as they would for a share sale. This limits risk exposure and is ultimately the primary draw for a buyer to consider an asset purchase over a share sale.

The buyer is not obligated to retain the company’s existing employees, providing more flexibility in staffing decisions. That being said, the seller may require the buyer to retain the existing employees or sign new contracts with the employees to avoid liability arising from wrongful dismissal claims.

Asset purchases also often allow for tax advantages, such as increasing the tax cost of depreciable assets to the current market value, which can reduce the buyer’s tax obligations in the future because they can obtain greater deductions in capital cost allowance.

Disadvantages to the Buyer

Due to the additional tax liability sellers may face in an asset sale, the seller will often seek to offset this tax burden by negotiating a higher purchase price. As a result, the overall cost of the transaction for the buyer may increase, making asset sales potentially more expensive for purchasers compared to share sales.

Benefits for the Seller

The seller may be able to command a higher purchase price because of the complexity of the transaction and because there are often increased tax obligations that may arise as a result of an asset sale.

In addition, the purchase price can reflect how liabilities are allocated between the parties. If the buyer agrees to assume only certain liabilities, leaving the seller responsible for others, the seller may use this continued responsibility as a basis for negotiating more favorable financial terms. Conversely, if the buyer agrees to take on a broader scope of liabilities, the seller may be willing to accept a lower purchase price in recognition of the reduced post-closing risk. Ultimately, the final price often represents a balance between the tax implications, the division of liabilities, and the relative bargaining power of the parties.

Disadvantages for the Seller

Asset sales are typically more complex, requiring detailed identification and transfer of each individual asset, which can lead to a substantial amount of paperwork and documentation to ensure that they are correctly assigned. In some cases, obtaining additional authorization from third parties may be necessary to transfer an asset, which can be costly and time-consuming. Moreover, some of the liabilities would remain with the seller rather than being transferred entirely to the buyer.

However, the most significant disadvantage for many sellers is the tax burden associated with an asset sale.  As addressed below, there may be significant tax benefits of a share sale such that it will often result in lower net taxes. 

Overall, while asset sales can offer buyers greater protection from liabilities and potential tax benefits, they also create added complexity and higher costs that must be carefully weighed against the seller’s ability to negotiate price and manage retained liabilities.

Purchase and Sale of Shares

In a share sale, the buyer acquires ownership of the company by purchasing its shares. Unlike an asset sale, the company itself, along with all its assets and liabilities, remains intact.

Benefits to the Buyer

If the company being purchased has significant goodwill, it may benefit the buyer to continue operating under the seller’s name. Furthermore, the purchase price may be lower since all the liabilities are transferred to the buyer. Finally, the seller will usually be required to provide warranties or indemnities to cover some of the liabilities that the buyer would otherwise assume in a share sale, reducing the risks associated with the purchased corporation’s liabilities.

Disadvantages to the Buyer

The main disadvantage to the buyer in a share sale is that they will assume all of the liabilities associated with the company being purchased. Therefore, it is essential to conduct  thorough due diligence to assess the risks and liabilities the buyer is taking on. Depending on the liabilities, buyers may seek indemnification from the seller or another party before finalizing the purchase.

In share sales, the employees are generally retained. However, some of the existing employee contracts may allow certain rights to be exercised upon the new ownership, which may give rise to severance obligations. The buyer would be liable for satisfying these obligations.

The buyer will also have a less desirable tax result as the purchase price will become the adjusted cost base of the shares, not the assets, limiting the tax deductible depreciation they can claim in the future. Usually, this will result in higher taxes in the initial years of operation after the purchase.

Benefits to the Seller

A share sale can be a more straightforward process for the seller as only the shares need to be transferred. Though, note, in some cases third-party consent may still be required before transferring the shares where there are loans or leases. Depending on the contracts involved, this may also be a straightforward process if there are terms in the contracts that address any third-party consent that may be required. No sale would proceed without the successful assignment of these contracts.

However, the main advantage is usually on the tax side. If the shares qualify, and the seller is an individual or individuals who have not yet used their capital gains deduction, each individual seller may be able to claim up to $1,250,000 of capital gains tax free^[1]. Additionally, capital gains are themselves only 50% taxable, and at a slightly lower net rate when received by individuals rather than corporations. As a result, the net taxes (including both corporate and those of individual shareholders) are often lower - and sometimes significantly lower - on a share sale.

That being said, it is important to obtain proper tax advice ahead of time, as the capital gains deduction is not always available.  Further, depending on the specific assets being sold, their fair market value and adjusted cost base, and the sellers’ plans, in some rare cases, there may actually be tax disadvantages of a share sale since it may allow for additional tax deferral.

Disadvantages to the Seller

Since there are ways to reduce taxes upon a share sale, the buyer may negotiate to buy the company for a lower price. The seller may have to lower the price due to the buyer taking on more risk of liabilities upon the share purchase. Also, due to the possibility of significant liabilities that the buyer is taking on, the buyer will likely require the seller to provide warranties and indemnities to cover some of the risks.

Overall, a share sale offers simplicity and potential tax advantages for the seller, but it requires the buyer to carefully manage the risks of inheriting all liabilities, making thorough due diligence and negotiated protections essential to a successful transaction.

Conclusion

Both asset sales and share sales present unique advantages and challenges. The optimal structure will depend on the specific business, tax profile, and objectives of the parties involved. Our Corporate Commercial and Tax teams can provide tailored advice to help structure transactions effectively.