Shares vs. Assets? What’s the Difference?
From the Archives: I wrote this when I was a Partner with Murphy Business Atlantic. One of the most common questions I get, the information is pretty timeless/useful. So I’m posting it here.
Selling or buying a business? One topic that is sure to come up (hopefully sooner, rather than later), is the type of sale. Is your deal a share sale, or an asset sale? If you’re not familiar with these terms, you’re probably asking yourself, what’s the difference?
From a practical standpoint, both asset sales and share sales can be very similar. You are still buying/selling the same business. And your customers will likely never know the difference. However, there can be significant implications from a tax and liability standpoint.
So, what’s the deal with asset sales?
Asset sales typically involve the sale of all or most of the assets in the business but not the shares of the incorporated company itself. For example, this can include inventory, receivables, equipment, leaseholds, logos, websites, phone numbers, and more. Any business can be sold through an asset sale.
Buyers typically prefer an asset sale, assuming the seller will agree to it. As a buyer, you can negotiate the allocation of the purchase price among the assets to achieve advantageous tax results. And because you aren’t acquiring the shares of the incorporated company, you assume none of the existing company’s liabilities. So there’s no reason to worry about the previous owner’s excessive tax write-offs, and a potential audit from the CRA.
However, there can also be complications. For example, you may need to transfer and/or negotiate the existing company’s licenses, leases, and contracts – which is not always a smooth process.
What about share sales?
Share sales involve the sale of the business itself, including the shares of the incorporated company, in addition to the assets referenced above. As a buyer, you are simply stepping into the existing company as a new owner. Unlike asset sales, only incorporated companies can be sold through share sales. If you are a partnership or a sole proprietorship, unfortunately a share sale isn’t an option.
Sellers typically prefer to sell shares, assuming the buyer will agree to it. This is primarily for tax reasons, as you may be eligible for the Lifetime Capital Gains Exemption (tax free money – who doesn’t want that?). Your business needs to meet certain requirements, and you may need to plan in advance.
The Bottom Line
While buyers often want to buy assets to minimize risk, sellers often want to sell shares for tax reasons. Every deal is unique, and there is no “right” answer. For what it’s worth, approximately 80% of the transactions our firm performs are share sales. Whether your deal is for shares or assets, there are a number of considerations to be aware of, and you should consult your legal and financial professionals for guidance.
Disclaimer: I am (thankfully) not a lawyer, nor am I an accountant. If any of this sounds like legal/financial advice, it's not. Take everything I say with a grain of salt. But not too much - I hear it's bad for your blood pressure.
