Quick answer: An asset sale lets buyers select specific business assets and leave certain liabilities behind. A share sale transfers ownership of the corporation, and that includes its assets and liabilities. In general, sellers prefer share sales. Buyers prefer asset sales.
Imagine you wanted to buy a hair salon. You have two main ways to structure the purchase. You can buy the assets of the salon or purchase the shares of the corporation that owns the salon.
The difference can affect what you acquire, which liabilities you take on, how the transactions get completed, and the tax treatment for the seller.
So, which option works best here? It depends on whether you are buying or selling. Let’s explain how.
What’s an asset sale?
Asset sale means buying individual assets of a business. For a hair salon, the transaction could include equipment, inventory, leasehold improvements, goodwill, customer lists, and other selected business assets.
The buyer can decide which assets matter to the business they want to operate. They can also leave certain unwanted assets and liabilities behind.
See how this gives the buyer more control over what comes into the transaction.
For example, if the salon has valuable equipment, a strong customer list, a recognizable trade name, and useful leasehold improvements, the buyer can structure the purchase around those assets.
An asset transaction also allows the buyer to depreciate the purchased assets after the acquisition.
- The buyer purchases selected business assets.
- The transaction can include equipment, inventory, goodwill, and leasehold improvements.
- The buyer can leave certain liabilities behind.
- Purchased assets can be depreciated after the acquisition.
What is a share sale?
Share sales work a bit differently. Instead of purchasing individual business assets, the buyer purchases the owner’s shares in the corporation. The corporation continues to own its existing assets and remains responsible for its existing liabilities.
For a hair salon, this means the buyer acquires the company that owns and operates the salon. Existing assets, contracts, operational licenses, and established business relationships can continue with the corporation.
Major concern for the buyer here is going to be that liabilities will remain with the company. Tax liabilities and lawsuits can therefore carry forward to the new owner.
A share sale only applies to an incorporated business. A sole proprietorship or partnership does not have corporate shares to sell.
- The buyer purchases ownership of the corporation.
- The corporation continues to own its existing assets.
- Existing contracts and operational licenses can continue with the business.
- Existing liabilities also remain with the corporation.
- A share sale applies to an incorporated business.
Which option is better for the seller?
Sellers often prefer a share sale because of the potential capital gain benefits.
An asset sale gives the seller flexibility over which assets they transfer. The seller can also avoid transferring unwanted liabilities or obligations that might make buyers reluctant to proceed.
But tax consequences can differ significantly.
An asset sale can create taxation at the company level when the corporation sells its assets. If the resulting profits are then distributed to the owner, the owner can face personal taxation as well.
A share sale can also help preserve the continuity and reputation of the business. The buyer takes ownership of the corporation rather than buying individual pieces of the business.
The buyer may still request indemnities to protect against potential claims that arise after the transaction.
- A share sale can provide capital gains advantages.
- An asset sale gives the seller control over which assets are transferred.
- An asset sale can help the seller avoid transferring unwanted obligations.
- Buyers may request indemnities in a share transaction.
- A share sale can help maintain the business’s existing value and reputation.
What are the pros and cons of a share sale?
Share sales can make the transaction much less complicated because the buyer purchases the corporation. The existing business structure can continue.
From a seller’s perspective, the lifetime capital gains exemption can make a share sale attractive when the relevant conditions are met.
A share transaction can also avoid land transfers in situations where those taxes would otherwise apply to an individual asset transfer.
The main concern for the buyer remains the company’s liabilities. The buyer does not get to select only the assets they like while leaving the rest behind.
A corporation’s non-capital tax losses can also carry forward and potentially be appplied against future income.
Pros
- Potential access to the lifetime capital gains exemption.
- Land transfer taxes can be skipped.
- The transaction can be less complex than transferring individual assets.
- Existing assets, contracts, and operational licenses remain with the corporation.
- Non-capital tax losses can potentially be carried forward against future income.
Cons
- The buyer takes on the corporation’s existing liabilities.
- Tax liabilities and lawsuits can carry forward to the new owner.
- The buyer needs to complete more extensive due diligence.
What are the pros and cons of an asset sale?
An asset sale gives the buyer more control over the transaction.
Instead of taking ownership of the entire corporation, the buyer can choose the assets needed to operate the business. This can include the salon’s equipment, inventory, goodwill, customer list, trade name, and leasehold improvements.
The buyer can also leave certain liabilities behind, including potential lawsuits or tax reassessments.
The structure comes with more accounting complexity because the individual assets need to be identified and valued.
The seller can also face an unfavorable tax result. The sale of assets can create taxation at the corporate level, followed by personal taxation when profits are distributed to the owner.
Pros
- The buyer can select the assets they want.
- The buyer can leave certain liabilities behind.
- Purchased assets can be depreciated after acquisition.
- The seller can choose which assets to transfer.
Cons
- The transaction involves more complex accounting.
- Individual assets need to be identified and valued.
- The seller can face taxation at the corporate level and again personally when profits are distributed.
Asset sale vs share sale: What should you choose for the hair salon?
Now let us get back to our hair salon example.
If you are a buyer, an asset purchase will give you more control. You can purchase the assets needed to operate the salon without automatically taking on every liability connected to the existing corporation.
If the salon has valuable goodwill, equipment, inventory, customer lists, and leasehold improvements, you have the option of structuring the purchase around those assets.
A share purchase gives you the existing corporation. The business can continue with its established assets, contracts, operational licenses, and relationships.
However, you also inherit the company’s liabilities, which makes due diligence particularly important.
The seller may prefer the share sale because of the potential capital gains treatment and the simpler transfer of the existing corporation. That creates a natural conflict. The buyer often wants an asset sale, while the seller often wants a share sale.
- A buyer may prefer an asset purchase to control which assets and liabilities come into the deal.
- A seller may prefer a share sale because of potential capital gains benefits.
- A share purchase keeps the existing corporation and its operations together.
- The buyer must examine existing liabilities carefully before purchasing shares.
Can you combine an asset sale and share sale?
Yes. A transaction can use a hybrid structure that combines elements of an asset sale and a share sale.
This approach is great for both sides, as they find common ground when their preferred structures differ. The buyer may want the benefits associated with acquiring selected assets, while the seller may want some of the benefits associated with selling shares.
A hybrid transaction can therefore bridge competing interests and allow the parties to structure the deal around their respective priorities.
The exact structure still needs accurate identification and valuation of the individual assets involved.
- A hybrid deal combines elements of an asset sale and share sale.
- It can help bridge the competing interests of buyers and sellers.
- The structure can provide some of the benefits of both transaction types.
- Individual assets still need to be accurately identified and valued.
Frequently asked questions
Is an asset sale better for a buyer?
An asset sale often gives the buyer more control because they can select the assets they want and leave certain liabilities behind.
Is a share sale better for a seller?
A share sale can be attractive to sellers because of potential capital gains benefits, including the lifetime capital gains exemptions where applicable.
Can you sell shares of a sole proprietorship?
No. A sole proprietorship does not have corporate shares to sell. A share sale applies to an incorporated business.
Why does a buyer need more due diligence for a share sale?
The buyer acquires the corporation along with its existing assets and liabilities, so the buyer needs to figure out what comes with the company.
Can an asset sale include goodwill?
Goodwill can form part of the assets transferred in an asset sale. So yes, an asset sale includes goodwill.
The final answer
You don’t have a universal winner between an asset sale and a share sale.
The buyer will often prefer an asset transaction because it provides greater control over the assets and liabilities they acquire. The seller will often prefer a share transaction because of its potential capital gains advantages and the simpler transfer of the existing corporation.
A hybrid transaction can get you another option when both sides want different outcomes.
Before choosing a structure, identify and value the assets involved and understand exactly what the transaction will transfer. The structure can affect the financial and practical outcome for both parties.
About the author
We are a team of business analysts specializing in Canadian service industry profitability. With 10+ years of analyzing business operations, we have helped dozens of entrepreneurs evaluate and finance business investment opportunities across Canada.
