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Asset Sale or Share Sale?

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Depending on the jurisdiction you live in, there are different implications for business owners who need to make the decision whether to sell the shares of their company or just the assets.

One consideration is the tax treatment of 'capital gains'. If you simply sell the assets of a business, you could potentially be taxed a higher rate than if you sold the shares of the company (which would be inclusive of the assets). On the flip side, many buyers would prefer to just buy the assets and shed any liabilities that may be lingering with respect to the shares of the business… for example, if there was concern about exposure to a potential lawsuit, employee issues or regulatory concern attached to the company as an 'ongoing concern'.

In circumstances where a company has a solid base of assets that another company finds to be attractive (for example, proprietary manufacturing equipment, patents, client contracts, etc…) but they do not want to own the company, which could be for a variety of reasons (such as the company wants to continue operations without the assets), then an asset sale may be advantageous for both the buyer and seller. However, the most prevalent reason for an asset sale is to simply mitigate potential, unrealized and unknown liabilities.

While it is typically considered illegal to sell the assets of a company if it is not in the best interest of the company's creditors (including litigants against the company), as long as the existing and known creditors are satisfied in the amount of the liability owed to them by the company, they can rarely argue that they were somehow harmed by the asset sale. In that sense, an asset sale is not simply a way to avoid creditors. However, depending on the statute of limitations in a given jurisdiction (i.e. the period of time someone has to sue another in civil court after the alleged action), some buyers may want to be rid of any liability attached to the assets by purchasing them through a transaction approved by a governmental entity that absolves the buyer of any liability. In extreme cases, this could be through a bankruptcy if the company cannot meet its liabilities. However, most commonly, it is usually through some sort of registered transaction in which existing creditors are notified that the assets of the company are being sold (for example in Ontario, Canada it is done through the 'Bulk Sales Act'). Often, companies will ensure that all creditor accounts are satisfied before doing the asset sale to avoid any potential issues due to creditors objecting to the sale.

Alternatively, a share sale can make good sense to both parties under some circumstances. First of all, the cost of doing a share sale to the buyer can be less than in an asset sale because the sellers may get to take advantage of certain capital gains tax exemptions from the sale. For example, if an asset sale is considered a taxable transaction at 25% to the seller, that same transaction may be tax-free if under a certain deal size or up to a certain threshold (in Canada there is an 'Enhanced Personal Capital Gains Exemption' of up to $750,000 for individual owners of qualifying privately controlled Canadian corporations - that's $750k someone can take tax-free!).

Depending on the tax treatment of a share sale, the price can be drastically affected because the net result to the seller can be considerably lower if done through an asset sale. If a buyer does their due diligence and is satisfied that the company does not have any material baggage or, in some jurisdictions, would like to buy the shares to take advantage of some carry-forward tax credits, then a share sale could be the right way to go.

All of this said, the most important thing buyers and seller can do is get solid legal and accounting advice with respect to any contemplated transaction. Paying a little bit for good transaction advice and structuring is money well spent, in my opinion.

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Keywords: selling companies, valuation, merger and acquisition

About the Author:

Ian Harvey is a finance professional in the small and medium-sized business market. He works with owners and managers to help them gain access to capital and structure their financial, operations and business development affairs to meet the needs to today and goals in the future.

If you have any questions about the content of this article or how your business can benefit from working with Ian and his network of SMB partners, please visit www.smbedge.com/contact.html

About SMB Edge!:

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Asset Sale or Share Sale?

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