Buying and Selling a Business: Shares or Assets?


The Structure of the Transaction

When a business is bought or sold, there are usually two potential structures for the deal:
1. The buyer purchases the assets of the business; or
2. The buyer purchases the shares of the operating company that runs the business.

Other less common options include amalgamations and plans of arrangement, however these are not discussed in this blog.

Taxes and liability are the usually driving factors in determining whether a transaction is structured as an asset or share deal. It is always advisable to engage an accountant early on in the process to perform a tax analysis to determine the tax impacts and benefits of each structure based on the particular circumstances. However, as a general rule, buyers usually prefer to buy assets, and sellers usually prefer to sell shares.

Considerations for the Buyer

From the buyer’s perspective, purchasing the assets of a business (instead of the shares) may have advantages. For example, the buyer can choose which assets to buy, thus potentially reducing the overall purchase price by avoiding purchasing unneeded assets. However, it really depends on the unique circumstances of the transaction – for example, if there are significant transfer taxes payable for assets such as real property and buildings, or sales tax on equipment or inventory, it may be more advantageous for a buyer to purchase shares.

Another consideration is that usually the liabilities of the company do not transfer to the buyer with the sale of assets. This means that a buyer who only buys assets would typically not be responsible for future tax liabilities or other contingencies incurred by the company prior to the purchase by the buyer. However, there are a number of exceptions to this, one being environmental liability which transfers to the owner of the asset, as well as liabilities to union employees under employment and labour law. If you are concerned about which liabilities you may be responsible for as a buyer, you should seek the advice of a lawyer.

Also, a buyer of assets does not have to take on non-union employees (unless the purchase agreement requires otherwise). This gives the buyer greater flexibility in determining which employees to retain, without necessarily being liable for severance pay for those employees who will not be hired on.

Moreover, the buyer can write up the value of purchased assets to their fair market value (as opposed to taking them on at their depreciated value through a share sale). In doing so, the buyer can create a larger depreciation base, and thus receive a higher capital cost allowance tax benefit going forward as the assets are depreciated annually for tax purposes.

Considerations for the Seller

As mentioned above, usually it is more advantageous for a seller to sell the shares of the company. Provided the shares qualify as capital, the proceeds are taxed as capital gains, meaning only 50% is included as income to the seller.

When an individual sells shares, they may qualify for the lifetime capital gains exemption in Canada (currently $835,714), provided that certain conditions are met such as the individual has not previously claimed this exemption and there is a disposition of “qualified small business corporation shares”. An accountant will be able to advise on whether or not a seller will qualify for the lifetime capital gains deduction.

In a share sale, the assets and liabilities remain with the company. This may transfer substantial risk to the buyer of shares. Therefore, in a share purchase agreement, a seller will normally be asked to make detailed representations and warranties about the company, in order to allocate risk between the buyer and seller, or else risk having a buyer walk away from the deal.

Overall Considerations

Because there can be significant implications for a buyer and seller depending on which structure is negotiated (assets or shares), the purchase price is sometimes modified to reflect the advantages one party is receiving over the other. For example, if a buyer insists on an asset deal, the seller may require a higher purchase price to offset a lost tax benefit of selling shares. Or, a buyer may be willing to pay a greater purchase price for assets in order to avoid assuming unknown liabilities.

Determining the structure of a deal and negotiating an appropriate purchase price is complex and usually involves a lawyer, an accountant, and in some cases a business valuator. If you are considering purchasing or selling a business, you should meet with the appropriate professionals to discuss your options.


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