The two types of business sales and what you need to know as a buyer or seller
Wayne Carew, Principal & Senior Advisor and Trisha Mossey, Transaction Advisor with MRSB Mergers & Acquisitions, on making sure you choose the buying or selling route that will maximize profit and minimize risk
First off, let’s briefly define the difference between an asset sale and a share sale for those who might not be familiar with these two options. As asset sale means you are selling your business through assets, or its valuable commodities. This could be physical assets such as equipment, furniture and land, or intangible assets like goodwill and patents. In this type of sale, the seller breaks the business down into all its assets and prices each one for sale (e.g. Equipment - $4,000, Vehicles - $12,000, Office Furniture - $2,500 and so forth). A share sale means the sale is solely based on the sale of shares, which includes the assets and liabilities of the business.
There are benefits and drawbacks to each kind of sale, which every buyer and seller should know before embarking on either process. In general terms, business buyers prefer an asset sale. This is mainly because the buyer can pick and choose which assets he or she wants to buy, leaving any undesirable ones out of the equation, and negotiating on the price of the chosen assets. On top of that, the buyer avoids inheriting any liabilities that would have come with the existing business.
In contrast, an asset sale is often a less desirable option for the seller, as it can result in a larger tax bill than if the seller had sold shares. In other words, the seller is not eligible to claim the capital gains exemption of the proceeds of the sale in this scenario. The proceeds of the sale are paid to the company, not to the seller directly.
So what about a share sale? Just as an asset sale is most favourable to buyers, sellers tend to lean toward selling shares because of the capital gains exemption involved. If a business is classified as an active business for tax purposes, the seller may be able to sell the shares and pay no taxes on the proceeds. All Canadians are eligible for an $800,000 lifetime capital gains exemption, so even if someone bought shares in a business for $1 and sold them for $20,000, they would pay no tax on the sale. In other words, all proceeds from a share sale are ‘sheltered’, with the seller reaping the benefits.
Unlike an asset sale, in a share sale the proceeds are paid directly to the owner of the business and any debts and liabilities become the responsibility of the new owner. You can see how a share sale looks better to a seller from this perspective!
When it comes down to it, the difference in preference between buyer and seller often leads to negotiation so that each party feels they are getting an optimal outcome. From the perspective of an M&A professional, we want to promote full understanding between buyer and seller. All factors need to be taken into consideration by both parties and if this is done, both sides should walk away feeling as if they’ve scored a major win.