- Is the business incorporated?
- Is ‘the corporation’ for sale; meaning the shares of the corporation, or is it just the ‘business-operation and assets’ that are for sale?
- Is it a Canadian or US business?
- Will the sale result in a capital gain?
- Will capital gains be taxable or tax exempt?
- What are the respective tax and other advantages/disadvantages to buyer and seller?
- Are there trade-offs to consider and if so, how will those trade-offs influence selling price and terms?
These are fundamental considerations to a sale offering, and we often find these questions have not been duly considered by owners who have tended to think of their company as simply “the business” rather than thinking of the legal characterization of ownership. But, the answers to these questions can bear real benefits and/or consequence.
Share Sale: The current shareholder(s) is the seller. In a Share Sale, the Company and the on-going business of the Company are valued and the buyer purchases all of the above by purchasing the Shares of Capital Stock of the Corporation whereby the buyer acquires ownership of the Corporation itself. Thereafter, the Corporation continues to operate the ongoing business and continues to hold ownership of the tangible and intangible assets and to retain responsibilities for the liabilities, but all under new corporate ownership. The buyer becomes the new shareholder(s).
Asset Sale: In an Asset Sale, the company, corporation, partnership or individual(s) is the seller. In the United States and Canada, whenever capital gains exemption is not at issue, the sale of a small business is most commonly structured in an Asset Sale. The tangible and intangible assets of the company are sold/purchased as a whole, intact, as an ongoing business concern. Such assets (and sometimes liabilities) are usually purchased by a new or other corporation, or by an individual. The new corporation, or individual buyer will commonly purchase along with the tangible assets, the name and goodwill of the business, and will carry-on the business activities of the business, but all as a new and independent legal entity from that of the former, but commonly under the same or similar name.
In Canada, the Share Sale is generally advantageous to a seller who has not previously utilized their once-in-a-lifetime federal capital gains tax exemption. An Asset sale is generally more attractive to a buyer (in both the US and Canada) because it often provides the Buyer with an opportunity to restructure asset values, also for tax advantage.
Whether Assets Sale or a Share Sale, the seller will have had a cost basis for whatever is being sold, either assets or shares. Assuming that cost basis is lower than the selling price, the sale will generate a gain that will be subject to (or exempt from) taxation. With the sale of a small business, the question often determining Asset Sale or Share Sale is, what are the offsetting tax advantages to the seller and buyer, and how does that affect the value?