At the start of a divestiture process business owners will need to decide if they are better off selling the shares of their business or selling all of the business’ assets.
In an asset sale, a seller will sell all or substantially all the business assets. As a part of that transaction, certain liabilities may go along with the assets. An asset sale is often preferred by purchasers. This is because the purchaser can cherry pick which assets (and potentially which liabilities) they wish to acquire. Also, and equally important, the asset sale allows the purchaser to know exactly what they are buying and thereby limit liability.
In a share sale, a seller will sell all or substantial all the shares of the business. A share sale is often preferred by sellers as it is a “clean break”; they do not retain the shares and any liabilities that may go with those shares.
Generally, sellers prefer to sell shares as opposed to assets, but there are advantages and disadvantages to each party resulting from each type of transaction. The main advantages (✔︎) and disadvantages (✕) to the seller of each type of sale are listed below:
Things to think about early on….
- In an asset sale, it is the corporation that is the seller, not the owners of the corporation. If the purchase agreement contemplates an earnout or deferred compensation arrangement, the corporation will need to be maintained in good standing (tax returns filed, maintenance at corporate registry) for up to several years post-closing.
- In a share sale, you will need to have all of your corporate records made available to the purchaser for their due diligence inspection. Get your minute books and corporate records in order.
- Shares of qualifying corporations may be eligible for the Lifetime Capital Gains Exemption. Asset sales do not qualify for this exemption. Engaging a tax advisor early can optimize your ideal transaction structure.
Making that fundamental decision to sell assets or shares is a complicated one. CCC has been advising entrepreneurs for over 50 years and can provide you with the guidance you need to make the right decisions to maximize your benefit in the sale of your business.
Managing Director, Vancouver
Chris has experience as both a lender and a private equity fund manager and has been involved in over 150 M&A and debt transactions. His experience on the buyside in both debt and equity brings a unique and valuable perspective to selling and financing a business.