The Pros and Cons of Asset Purchases vs Share Purchases

by | Nov 16, 2021 | Real Estate Disputes

When it comes to buying or selling a business, there are two primary methods of going about the transaction; an asset purchase, or a share purchase. A share purchase involves the purchase of shares of a company effectively transferring the company’s assets and liabilities to the purchaser. An asset purchase, on the other hand, involves the purchaser buying some (or all) of a company’s assets. Oftentimes, the purchaser may prefer an asset purchase and the vendor may prefer a share purchase; this preference, however, will vary depending on a variety of factors.

Share Purchases

Share purchases are typically completed by the purchase of one hundred percent of the company’s shares.  If you are selling your business to a third party, it will typically involve one hundred percent of all issued shares.  However, there are instances where a party can only buy a certain number of shares.  For instance if a corporation was owned by two people and one person wanted to be bought out.

This method is typically preferred by the vendor due to the personal income tax benefits. The vendor can also take advantage of the Lifetime Capital Gains Exemption (LCGE).

The purchaser can sometimes avoid paying sales tax on assets such as equipment, inventory, and property transfer tax on real property and buildings.

Purchasers may be hesitant to agree to share deals due to the fact that the purchaser inherits all of the company’s liabilities along with its assets. This introduces a risk factor because liability is often unpredictable at the time of the transaction; for this reason, there are some precautionary measures purchasers can take in order to avoid any liability. For instance, purchasers should request an indemnity agreement to ensure they will not be responsible for unforeseen liabilities that arise within a specific period of time. In addition to this, it would be wise for purchasers to take the appropriate due diligence precautions by conducting searches and investigations (i.e. title, tax, zoning, and fire searches) prior to entering into any purchase.

You might want to address why purchasers like share purchaser agreements as well – goodwill, reputation, location.  As an example – would you want to buy just the assets from Tawse Winery to start a new winery or buy the name and branding as part of the share purchase?

Asset Purchases

            Asset purchases are completed by the sale of some or all of a company’s assets, including real property, contracts, lease agreements, equipment, and the like.

This method of purchasing a business is sometimes preferred by the purchaser because it allows them the ability to be more selective of the assets they are looking to purchase.  It may better tax implications for the purchaser for depreciation purposes. In these kinds of transactions, the vendor may accept the offer, or they may decline and only desire to sell of the assets together. Purchasers also desire asset purchases because they involve less liability risk in comparison to share purchases. In asset purchases, the purchaser can use the purchased assets to create a new company, which reduces the risk of unexpected liabilities that may arise within the current company.

However, as previously states, it is very important that the purchaser conduct the appropriate due diligence searches before completing an asset purchase.  It is important to also speak with your accountant about the different tax implications.

Whether you are looking to purchase or sell a company, there  are a lot of factors to consider when choosing  between an asset purchase or a share purchase. Should you find yourself facing this decision, contact us for a free consultation to explore all of your available options before entering into any transactions.