Asset vs. Share Purchase – An Insider’s Guide
Asset purchase vs share purchase – when you’re buying or selling a business, it’s something you need to understand. Each comes with its own legal, financial, and tax implications, and grasping these differences helps to make an informed decision that aligns with your goals.
In this article we will explain what these terms mean and the variables between the two.
What’s The Definition?
An asset transaction pertains to the acquisition or disposal of specific or all assets belonging to a company, encompassing items such as equipment, inventory, real estate, contracts, or lease agreements. While certain liabilities may transfer under successor liability regulations, the seller maintains ownership of a portion of the operational entity.
In contrast, a share purchase entails acquiring shares or ownership stakes in the target company, leading to ownership of the entire enterprise, encompassing assets, liabilities, and commitments. The purchaser assumes all existing liabilities and associated risks of the business, including those not immediately evident.
Understanding The Liabilities and Risks
In an asset purchase, the buyer has greater discretion in selecting which liabilities to accept, allowing them to avoid assuming undesirable debts from the seller. Nonetheless, specific legislation may mandate the transfer of certain liabilities despite this discretion.
Conversely, in a share purchase, the buyer takes on all present liabilities and risks, including both identifiable and unforeseen ones, such as ongoing legal disputes and tax responsibilities. When the target business presents significant potential for unforeseen liability claims—such as those related to product liability, professional negligence, or environmental hazards—an asset purchase is often the preferred option.
Carefully Consider Contracts and Permits
In an asset purchase, the buyer usually negotiates or secures new contracts, licenses, and permits to sustain business activities, as existing agreements do not automatically carry over.
In a share purchase, existing contracts and permits typically remain in place as the legal entity is unaltered, eliminating the necessity for extensive renegotiations. This situation is advantageous as it often allows the buyer to maintain business operations seamlessly, avoiding the task of securing new approvals or negotiating new contracts.
Be Aware Of Tax Implications
The decision between a share acquisition or asset acquisition grows increasingly intricate due to the difference of interests between the buyer and seller concerning income tax considerations. Generally, buyers favour asset purchases because they establish a cost base for specific assets eligible for depreciation. On the other hand, sellers lean towards share purchases as they may qualify for preferential tax treatment, treating the proceeds of the sale as capital gains. Negotiating this conflict should be handled with legal counsel and you will want to be sure to review all the fine print and clauses involved to make sure you fully understand what you are buying.
Due Diligence Is Crucial
Another difference between share and asset purchases lies in due diligence. Share purchase due diligence tends to be broader and more comprehensive, involving the assessment of the entire target company and the assumption of all its liabilities. Asset purchase due diligence is more targeted, focusing on the specific assets slated for acquisition and giving the purchaser greater control over the liabilities they assume.
Recognizing The Impact On Or Transfer of Employees
In an asset purchase situation, employment contracts do not transfer automatically to the buyer. While this type of purchase enables a selective assembly of the workforce, some obligations, like length of service for severance pay, may still carry over. In a share purchase, the purchaser inherits the entire workforce along with all severance obligations to employees, which can significantly influence any future plans regarding downsizing or integration.
Consider Conveyancing Costs
Transferring shares is a simpler process compared to completing an asset transfer. Share transfers typically entail a limited number of conveyance documents, whereas asset transfers require a comprehensive array of documentation along with potential third-party consents. Also, asset transfers may involve substantial registration expenses and Property Transfer Tax if real estate is part of the deal. Share purchases may also encounter contracts with third parties containing provisions restricting a change in control.
Most Importantly, Get Legal Advice
Whether you’re considering buying or selling a company, there is a lot to contemplate when deciding between an asset or share transaction.
For purchasers, it’s important to weigh potential liability and tax implications and to safeguard your investment by conducting thorough due diligence searches.
As a seller, it’s prudent to assess income tax implications and potential employment law liabilities.
Although buyers typically prefer asset transactions and sellers lean towards share transactions, individual circumstances and desired objectives may alter these preferences. Consulting with a lawyer who specializes in business acquisitions and sales will help ensure you thoroughly explore all options before finalizing any agreements.
At Hukam Law, our team of lawyers have extensive experience in assisting individuals like you when buying or selling a business or business asset. Give us a call 📞 at 705-915-0884, or send us an email at info@hukamlaw.ca, and we’ll make sure that you have the representation you need in your business transaction. Plus, we’ll answer any questions you have along the way so you can make informed decisions empowered by knowledge.
***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.