(Asset vs Share Transactions)
When the time comes to sell your business, there are two main ways to structures the deal: (1); an asset sale or (2) a share sale. Each comes with its own pros and cons for both the buyer and seller. Below we have outlined the major differences between the two as well as some of the pros and cons of each
An asset sale/purchase is a transaction where the buyer purchases the operating assets of the business. Assets purchased include tangible (fixtures, furniture, equipment, inventory, leasehold improvements, etc.) as well as intangible (brand-name, client list, contracts, website, phone numbers, etc.). The sellers company continues to exist post closing, deposits the money received from the sale into its bank account and removes the sold assets from its balance sheet. An asset sale often requires dealing with many ancillary items such as employment termination and rehiring, lease assignment with landlord consent, contract transferability, creditor payouts, etc. The main focus in an asset sale/purchase is ensuring that the assets being transferred are free and clear of any liens and are truly owned by the selling party. A buyer often prefers an asset sale because the risk to the buyer is much lower than in a share purchase/sale. A seller often would prefer a share sale for the reasons discussed directly below.
A share sale entails selling the entire business, including all assets and liabilities. Due to this, due diligence and the representations and warranties contained in the purchase agreement must be extensive. A seller will often prefer a share sale due to the lifetime capital gains exemption, which provides that the first $850,000 of profit made on a share sale is exempt from income tax.
Every business transaction is different and selecting an asset sale versus a share sale is an important consideration for both buyers and sellers. At Kay Law we have extensive experience negotiating and closing all types of business transactions. Contact us today for your consultation.