Assets vs. Shares – How will a transaction proceed?
The most basic decision when determining how a business purchase/sale will proceed is to determine what is being sold and bought. Generally, there are two options: a sale of the business assets; or the sale of the ownership interest in the ownership entity, be it a sale of a corporation’s shares, a partnership’s partnership units, or the sale of joint venture units.
Buyers normally prefer an asset sale, and normally are willing to pay a premium to purchase assets. Assets are preferred by buyers because a buyer can determine their existence, quality, whether or not there are any liabilities attached – and require the seller to discharge those liabilities, and they have the option of picking and choosing among the assets if the seller is willing to sell less than all the business assets. Asset sales may result in higher tax payable by a seller following completion, so the seller is less likely to prefer an asset sale strictly for tax reasons. Plus, the seller may be retiring and may have no use for the business entity the seller was using to operate the business.
Sellers often prefer share sales as the sale of shares involves both the business assets and its liabilities. Sellers must disclose all liabilities to a buyer and such disclosure is documented in the buy/sell agreement. There is potential in a share sale for unknown or undeterminable liabilities associated with the business; an issue which should make any buyer nervous. The parties work through all of these unknown or potential scenarios by allocating risks/responsibilities in the buy/sell agreement by using holdbacks and indemnities. Enforcing such provisions may cost the buyer in litigation costs if the seller cannot be found, ceases to exist or simply refuses to pay, but at least the buyer will have some avenue to seek compensation from the seller. Buyers normally look to pay a discounted amount to purchase shares and sellers are normally willing to accept this given the favourable tax position they are likely to enjoy through a share sale.
There are numerous additional reasons that either party to a business transaction should seek their legal counsel’s advice prior to committing to the transaction. We would be happy to discuss these with you if I you are considering buying a business, or selling your existing business.