Asset Sale vs. Share Sale
When making the decision to sell or buy a company there are two ways to structure the deal – as an asset or as a share sale (purchase). Each comes with its own pros on cons for both the buyer and the seller, and choosing which one is most appropriate depends entirely on that particular situation. At Beacon Advisors, we help you weigh your options Below we have outlined the major differences between the two as well as some of the pros and cons of each.
An asset sale is a transaction where the buyer purchases the operating assets of a business. An asset sale, contrary to popular belief, does not necessarily mean an equipment or liquidation sale. Assets purchased include tangible (fixtures, furniture, equipment, inventory, leaseholds, etc.) as well as intangible (brand name, client list, contracts, etc ). From a balance sheet perspective, the purchaser’s company records the acquisition by the appropriate amount as an investment and lists the acquired assets with their negotiated purchase price. The seller’s company continues its existence post-closing and shows an increase in cash proceeds from the transaction, removing the sold assets from its balance sheet.
An asset sale might require a longer preparation and negotiation of all the deal aspects (including asset allocation, employment termination and rehiring, lease assignment, contract transferability, creditor payouts, etc). However, once all these issues are addressed, moving to closing and completing the transaction is a formality.
The major advantage from a purchaser’s perspective in executing an asset deal is the clear severance of liabilities (employees, creditors, etc.) associated with the business pre-closing. Another advantage of the asset deal for the purchaser is the possibility to renegotiate the allocation of the purchased assets in a more tax-efficient way.
A share sale of a business interest transpires when the owner of a company sells shares of the existing corporation to the new owner.
In a share deal, there are significantly more legal ramifications involved. By purchasing the shares of an existing corporation the new owner is legally responsible for all liabilities of the business. When completing a share purchase the buyer needs to be fully aware of all these outstanding liabilities by doing thorough due diligence on the corporation, its legal status, tax filings, employee payments, licenses, outstanding creditors, etc.
One of the advantages of a share sale for the seller is that they may be eligible for the once in a lifetime $750 000 Capital Gains Exemption and as such, net a higher gain than selling an equivalent portion of the company through an asset deal. From a buyer’s perspective, a share deal allows for a smoother transition and less disruptions of the existing business operations.
Share deals usually are fairly straightforward to negotiate and put the main framework around, however, require longer and more thorough due diligence than an asset deal before moving to closing.
Every business transaction is different, and neither one of these sale types can be universally applied. The above pros and cons outlined are by no means exhaustive, thus it is important to consult with a professional intermediary to assess which kind of sale is the right fit for you and your company.