Assets vrs. Shares

 When I take on a new business listing the seller will often inform me that his accountant “strongly recommends” that he should do a share sale.   This is theoretically good advice for the seller from a tax perspective, unfortunately the prospective buyers are being told by both their accountant and their lawyer not to buy shares under any circumstances.   As a Broker, how do we rationalize this significant difference in the parties advice?

Let’s start with a brief explanation of the differences in the two types of sales. First, let me say that this discussion applies only to legally incorporated limited companies.  A limited corporation (Ltd, Inc. etc) is a legal entity in and of itself, and the ownership of that entity is held via the issuance of shares to the participants involved in the company.  The corporation owns and controls the assets and liabilities of the business.  Unincorporated Partnerships and sole proprietorships do not have shares and any assets are effectively owned by the individuals involved.

A buyer can acquire the business by way of the purchase of specific assets (vehicles, equipment, fixtures, property, goodwill, etc.).  In this case the corporation will sell those assets at a pre-agreed value to the buyer … the buyer will typically roll those assets into a new or existing company and the selling corporation will receive the proceeds of the sale directly.   The original shareholders of the corporation still control the selling company but have effectively sold off the active operating business assets.

In the case of a share sale, the buyer will, either personally or through a new or existing company, buy all of the outstanding shares of the selling company for an agreed value directly from the shareholders.  The buyer then assumes control of the selling company including all of the operating assets including capital assets, cash, prepaid accounts, deposits, contracts, etc., all of the payables, and other short and long-term liabilities of the company.   Capital assets are assumed at depreciated cost value, and the Corporation continues to assume the risk for any unanticipated liabilities (such as lawsuits, tax reassessments etc.) that might surface after the purchase, even though the event may have occurred prior to the sale.

In order to make a share sale work we must, as Brokers, find reasons for the buyer to justify a share purchase.   Compelling reasons to buy shares could be to make use of existing financing within the corporation, or to protect significant non-transferable on-going contracts in place that could be voided if the selling company ceases active operations, although in most transactions this is not the case.  Most often, we need to look at some pricing advantage to the buyer to offset his tax disadvantages and liability risks. This will, of course, mitigate to some extent the benefits of a share sale to the seller.   It is the Brokers job to help find that middle ground.

 

Patrick S. Preston, Agent

Business Brokerage Specialist