Share sale or asset sale, the questions to ask your advisers

Almost every business sale in Canada is one of two things: a sale of the shares of the company, or a sale of the assets the company owns. The choice changes what the buyer receives, what the seller keeps, how each side is taxed, what happens to employees and contracts, and how risk is shared after closing.

We are not lawyers or accountants, and this guide does not give legal or tax advice. What it does is explain the shape of each structure in plain words and give you a list of questions to take to your lawyer and your CPA, so that the first time you hear the terms is not in a buyer's letter of intent.

What each structure actually transfers

In a share sale the buyer purchases the shares of the corporation from the shareholders. The company continues exactly as it was, with the same contracts, employees, licences, bank accounts, tax history and liabilities. Only the ownership changes. Nothing needs to be assigned, because the legal person that signed everything is still the same.

In an asset sale the corporation sells specific things, such as equipment, inventory, customer lists, goodwill, intellectual property and the business name, to the buyer or to a company the buyer sets up. Contracts and leases must be assigned with the counterparty's consent, employees must be offered new employment, and licences must often be reissued. The seller's corporation keeps whatever was not sold, including its history and any liabilities not expressly assumed.

Why sellers and buyers usually want different things

Sellers often prefer a share sale. It can be cleaner, since the company carries on without assignments, and there may be tax treatment available to individuals selling shares of a qualifying small business that your CPA will want to assess. Buyers often prefer an asset sale. They can choose what to take, leave unknown liabilities behind, and may obtain tax treatment on the purchased assets that your buyer's CPA will value.

Neither side is wrong. The difference in value between the two structures is real and it belongs on the negotiating table alongside the price. A buyer who insists on assets may need to pay more, and a seller who insists on shares may need to offer stronger representations, an indemnity and a holdback to cover the history the buyer is inheriting.

Questions to put to your CPA

• Under each structure, what would I personally receive after tax from the same headline price
• Do my shares currently qualify for any treatment available on the sale of small business shares, and if not, what would need to change and how long would it take
• Are there assets inside the company, such as property, investments or excess cash, that a buyer would not want and that should be moved out before a sale
• How would the purchase price be allocated among assets in an asset sale, and what does each allocation mean for me
• What are the sales tax consequences of each structure in British Columbia and is any election available
• How do the structures affect the timing of when I receive money and when tax is due

Questions to put to your lawyer

• Which of my contracts, leases and licences can be assigned, which need consent, and which cannot be transferred at all
• What happens to my employees under each structure and what are my obligations to them
• What representations and warranties would a buyer reasonably ask for in a share sale, and how long would they survive
• What indemnities, holdbacks or escrow would protect the buyer against liabilities from before closing, and how do we limit them
• If the buyer is a corporation, who stands behind its obligations to me after closing
• What should the letter of intent say about structure so that we are not renegotiating it in the purchase agreement

Deciding before the letter of intent

The structure should be settled, at least in principle, before you sign a letter of intent. A letter that says only a price, without saying what is being bought, leaves the most valuable question open, and the side with more experience will win it later. We have watched deals stall for months because the price was agreed on the assumption of one structure and the agreement was drafted on the other.

In practice, a BizSell.ca sell-side engagement raises the structure question in the valuation stage, so that your lawyer and CPA have done their analysis before buyers appear and the package describes the structure we are seeking. Buyers can still propose alternatives, and we help you weigh them, but you negotiate from a position you understand.

A note on hybrid approaches

Some transactions use elements of both, for example a reorganisation before closing so that the buyer acquires shares of a company that holds only the operating assets. These approaches depend entirely on your facts and on professional advice. Our role is to make sure the question gets asked early, that the answer is reflected in the price, and that the whole team, lawyers, CPAs, buyer and seller, is working from the same understanding. Call or text (604) 632-4959 if you want to talk it through.