April 2011-Many businesses are incorporated so for the purpose of this article, we will assume that the business is a corporation. First of all, I should give a quick primer on a corporation. It is owned by the shareholders and is an entity much like a person. The corporation owns the assets of the business, including real estate, equipment, inventory etc. When considering a purchase of an incorporated business, there are advantages and disadvantages in purchasing assets vs. shares. Generally, sellers prefer to sell (all of the) shares but buyers prefer to buy assets.
Let's take a look at this from the buyer's side.
The advantages of an asset purchase are:
* the buyer has no legal liability for the corporation's debts
* the buyer is not usually saddled with problematic employees
* the amount paid for the assets at market value can be depreciated by the buyer and is often higher than their book value
* if the business had a negative history, the buyer starts with a clean slate
The advantages of a share purchase are:
* it is not necessary to negotiate the transfer of leases, licences and contracts
* the buyer may be able to utilize business losses for income tax purposes
* all of the corporation tax and employment documentation remain as is
Generally, the advantages and disadvantages of selling assets vs. shares from the seller's point of view are the flip side of the above. However one point not dealt with is an important income tax issue. On a share sale, sellers can utilize the $500,000 shareholder capital gains exemption, something not possible with an asset sale.
It is important to discuss these issues with your legal advisor and your accountant at the earliest possible stage so you can decide what route to take on a sale or a purchase of a business.