One of the first decisions in buying or selling a business is the decision on whether it will be a share transaction or an asset transaction. In a share transaction, the company itself is bought by the purchaser from the shareholders. In an asset transaction, the purchaser is buying the assets from the company. While there is no cut and dried rule, vendors generally prefer a share sale and purchasers generally prefer an asset sale.

The vendor’s preference is tax driven. A vendor can usually obtain better tax treatment on the proceeds of a sale of shares because the sale will result in a capital gain. As well, if a number of conditions are met, the share sale may qualify for the small business lifetime capital gains exemption which, if applicable, will mean that no tax is paid on the proceeds of sale of a small business.

The purchaser’s preference is driven by both liability and tax considerations. When you purchase the shares of a company, you purchase it “warts and all.” Any past liabilities of the company still exist and become the purchaser’s problem after the sale is complete. To a certain extent, the purchaser can be protected by negotiating for indemnities from the vendor, but indemnities are not always effective and it may be better to avoid the liability all together by buying the assets. The tax benefit to buying the assets is that it generally permits the purchaser to take better advantage of deductions such as depreciation of the assets and interest paid on any borrowing used to fund the transaction.

The general proposition above is subject to a number of considerations depending on the specific circumstances. For example:

  • Real estate sold in an asset sale will result in land transfer tax and also may result in a reappraisal of property tax against the real estate.
  • The number of employees and length of their service may be relevant. Employees acquired via a share purchase will be entitled to notice / pay in lieu of notice for the time of employment both before and after purchase.
  • Certain assets will have specific tax rules surrounding them which may make an asset or share transaction more desirable.
  • Depending on the nature of the assets involved, legal fees may be greater in an asset transaction.
  • Important contracts of the business may contain restrictions on change in control, assignment or transfer.
  • The parties may each have a different view on their desired transaction - in that case, the decision to buy/sell assets or shares will depend on the relative negotiating strengths of the parties.

Because of these and other considerations, it is important to obtain legal and tax advice regarding your particular transaction and the benefits and limitations of proceeding by way of share or asset purchase or sale.

If you are seeking advice concerning a planned purchase or sale, please feel free to contact Cameron Business Law.