Asset vs. Share Purchase: What's Right for Your Business?

Written By: Richard A. Schaub

One of the most critical decisions when acquiring or selling a business is whether to proceed with an asset purchase or a share purchase. In an asset purchase, individual assets are acquired separately. Conversely, a share purchase involves buying 100 percent of a company's shares and transferring all its assets and liabilities to the purchaser.

Each approach has its own advantages, disadvantages, and legal considerations. Understanding these differences is crucial for making an informed decision that aligns with your business goals and needs.

Understanding Asset Purchases

An asset purchase involves buying some or all of a business's assets rather than its shares. These can include tangible assets like contracts, equipment, inventory, and property, as well as intangible assets such as intellectual property, including trademarks and customer lists.

Purchasers often favour asset purchases because they can select the assets they acquire and avoid any unwanted liabilities of the company. For instance, a purchaser may only be interested in a company's inventory and equipment, making an offer exclusively for these assets.

Asset purchases also tend to involve lower liability risk for purchasers. Purchasers can use the acquired assets to establish a new company, thereby minimizing the risk of unforeseen liabilities associated with the company. However, regardless of the reduced liability, it remains crucial for purchasers to conduct thorough due diligence before finalizing an asset transaction.

Understanding Share Purchases

A share transaction involves buying or selling 100 percent of a company's shares. This method is generally more straightforward than an asset deal, requiring fewer transfer documents. The necessary documentation typically includes only the transfer of shares and occasionally the assignment of shareholder loans.

Selling companies often prefer share transactions due to the associated personal income tax advantages. The proceeds from share sales are taxed as capital gains, with only 50 percent of the proceeds considered taxable income. However, per the 2024 federal budget, capital gains for corporations and trusts will be increased to 66.7 percent on June 25, 2024.

Additionally, lifetime capital gains exemptions are available for the sale of shares in qualifying small businesses, offering significant financial benefits to the company. Consequently, a company might be inclined to negotiate a lower sale price if the purchaser agrees to a share transaction.

Purchasers can also benefit from certain tax advantages in share transactions. Suppose the company has accumulated unused non-capital tax loss carryforwards. In that case, these can be applied against future income, offering potential tax savings. Furthermore, purchasers may avoid paying sales tax on assets like equipment and inventory, as well as property transfer tax on real estate and buildings.

Despite these benefits, purchasers may hesitate to agree to a share deal because they assume all of the company's liabilities along with its assets. This can be risky, as some liabilities may be unknown or unforeseeable at the time of the transaction. Additionally, the purchaser inherits all the company's employees.

To mitigate these risks, purchasers should undertake comprehensive due diligence by conducting searches and investigations, including, but not limited to, title, personal property, tax, zoning, and litigation searches, before finalizing the transaction. The purchaser should also consider requesting an indemnity agreement or a holdback of the purchase price for a certain period to protect against unforeseen liabilities that might arise after the deal is completed.

Comparison: Asset Purchases vs. Share Purchases

Conclusion

When deciding whether to acquire or sell a business through an asset purchase or a share purchase, it is crucial to understand each method's distinct advantages, disadvantages, and legal considerations. An asset purchase allows buyers to select specific assets and minimize liability risks. In contrast, a share purchase offers simplicity, continuity, and potential tax benefits but comes with the assumption of all liabilities.

Careful consideration of your business goals, risk tolerance, and the specific circumstances of the transaction will guide you in making the right choice. Thorough due diligence is essential in both scenarios to ensure a smooth and successful transaction.

If you are considering acquiring or selling a business and need expert legal advice to determine the best approach, contact our firm for personalized guidance. The team at SB LLP can help you navigate the complexities of asset and share purchases, ensuring a smooth and successful transaction.

*This article is not intended to provide legal advice. If you have specific questions related to your transaction, please feel free to contact the writer, Richard A. Schaub, or any other practitioner in our corporate and commercial department.