Share vs Asset Sale

A fundamental consideration in preparation for, and structuring of the sale offering, will be the question as to whether the offering will be structured as an Asset sale or as a Share sale. And, fundamental to that question are the questions: Is your business incorporated?  Is the seller eligible for capital gains tax exemption on the sales proceeds?  Does the current share structure maximize on that tax exemption?

We often find these questions have not been duly considered by owners who have tended to think of their company as "the business" rather than in the legal characterization of ownership. But, the answers to these questions can bear real consequence.

Share Sale - The Shareholder(s) is the Seller. In a share sale, the Company and its on-going business are valued and the buyer purchases all by purchasing the Shares of Capital Stock of the Corporation. The Buyer assumes ownership of the Corporation itself. Following the sale, the Corporation continues to operate the ongoing business concern, and to hold ownership of the tangible and intangible assets and to retain responsibilities for the liabilities, but all under new corporate ownership; new shareholders.

Asset Sale - In an Asset sale, the company, corporation, partnership or individual(s) is the Seller. In the United States and Canada, whenever capital gain exemption is not at issue, the sale of a small business is most commonly structured as an asset sale. Thus the tangible and intangible assets of the company are valued and sold as a whole, intact, as a going concern. Such assets (and sometimes liabilities) are usually deposited into a new corporation owned by the buyer. The new corporation will assume the name (generally) and goodwill, and will continue the business activity of the selling entity, but all as a new and independent legal entity from the seller.

In Canada, the Share sale is generally advantageous to sellers who have not previously utilized their once-in-a-lifetime federal capital gains tax exemption. An Asset sale is generally more attractive to a buyer (in both the US and Canada) because it often provides the buyer with an opportunity to restructure asset values, also for tax advantage.

Whether Asset Sale or a Share Sale, the Seller will have had a cost basis for whatever is being sold, either assets or shares. Assuming that cost basis is lower than the selling price, the sale will generate gain that will be subject to (or exempt from) taxation. With the sale of a small business, the question often determining Asset sale or Share sale is, what are the offsetting tax advantages to the seller and buyer, and how does that effect the value?