Is there a tax advantage to a seller for a share sale?
For Canadians, there is a potential tax advantage if the Seller has not used their lifetime capital gain exemption (LCGE). This makes a share sale more attractive to a Seller than an Asset Sale.
That being said, there are a few scenarios where a Seller may want to consider an Asset Sale:
- They have already utilized their LCGE and would receive no tax benefit from a Share Sale
- Their corporation owns assets they do not want included in the sale (a common example is real estate).
For Buyers, it is almost always beneficial to purchase a business via Asset Sale. The biggest reason is because when you purchase the shares of a company, you are also taking responsibility for all liabilities of the company’s history. For certain industries (medical care, construction, electrical, plumbing, etc.) these liabilities could be significant.
What are the liabilities that get exposed if I'm buying a 50-year-old business vs. a 10-year-old business?
In theory, there is really no difference in liability of a 50-year old company and a 10-year old company. As, in either case, the Buyer is exposed to any potential historical claims. The obvious difference is that a 50-year old company is 5x more history where something may have gone wrong.
That being said, Buyers can protect themselves against liabilities using indemnity clauses in the Share Purchase Agreement. A seller typically agrees to shoulder all liabilities that existed prior to the sale taking place.
If I pay more taxes with an asset sale - does that change my valuation?
No. DealBuilder’s normal valuation is based on an asset sale approach. This doesn’t take into account any tax impacts for the Seller.
Can a share or asset sale be used as a negotiating tool?
Yes, if the Seller prefers a share sale, this creates room for price negotiation because of the tax implications on both sides (i.e. higher price for asset sale, lower price for share sale).
Is there a difference in legal costs to sell as a share sale vs. an asset sale?
In most case, no. That being said, some lawyers state that asset sales are less expensive than share sales - but this isn’t consistent across legal firms. So, the answer is as with almost everything, it depends.
What are common mistakes that people make in regarding the decision of asset vs. share sale? Is there anything people should be looking out for when making that decision?
If we put our Buyer cap on, we would be leery of doing a share sale for an older company and/or a company that doesn't have their books up to date.
If you find a Seller has to go to their lawyer and spend $5,000 cleaning up books prior to sale, we would be a little worried as a Buyer. As you could end-up dealing with past tax liabilities, which may trigger an audit.
How does working capital factor into a share or asset sale?
In most cases, working capital is included in a share sale. For an asset sale, it is hardly ever included in the price.
What happens if I have cash in my bank or other assets that I don't want to sell with the company? Is it better to do an asset or share sale?
This is more of a personal accounting situation.
Since everyone has a different financial picture, you will want to do is sit down with your accountant as a Seller. During this meeting you need to decide if it's possible to clean up your company and remove these assets in a tax-efficient manner prior to purchase. If the answer is no, then an asset sale sale is better for you.
This underlines the importance of preparing to exit your business in advance. For example, selling your business becomes more complicated if you've got excess cash, commercial property, and/or rental properties held inside your operating company. Based on the potential tax savings of being able to sell via share sale, it is likely worth your time to remove these assets from your business prior to finding a buyer.
I'm selling my business as a share sale, but I have business partners that are also shareholders and they refuse to sell. Am I out of luck or is there any alternative approach to sell the business?
Well, if attempting to do a share sale, you may have some difficulties unless you've got a shareholder agreement with what's called the 'Drag Along Clause.' If you have a Drag Along Clause in-place it might be possible (but not guaranteed, speak with your lawyer). The best plan? make sure your partners are on-board to sell or open to buying your shares.
What happens with employees in a share vs asset sale?
The typical process with an asset sale is for the Seller to lay off all employees prior to close with the Buyer immediately offering them a job under their new ownership.
In this scenario, the Buyer is responsible for any severance that is outstanding after the new employee has signed with them. If an employee has worked for a company for ten years and is laid off prior to completion (and does not want to work with the new owner) the Seller is responsible for paying the severance. If the employee signs on with the new owner, the owner assumes all severance responsibility for the employees previous 10 years moving forward.
For a share sale, the buyer essentially assumes all a severance obligations of the employees. The benefit is that it is more clear that nobody loses their job, the employees keep on doing what they're doing, and the Buyer then assumes severance liability for all employees.