Asset Sale vs Share Sale
There are two ways to sell a business—through a share sale or an asset sale. Following is some information about each to help you decide what’s right for you.
A share sale involves selling the shares of the corporation to the buyer. When the shares transfer to a new owner, the corporation being sold stays intact, the outgoing owner resigns his/her position as president and director, and the new owner is appointed to these positions.
A share sale is often very desirable to the seller as this type of transaction often qualifies for the capital gains exemption of up to $800,000 that is provided to all Canadian citizens once in our lifetime. A share sale is often not desired by a buyer because of contingent liabilities that might come with the corporation, such as unpaid taxes or potential lawsuits for something done prior to the new owner taking over.
An asset sale occurs when a seller directs the corporation he or she owns to sell the assets and goodwill (almost always including the name) to another corporation. Quite often, the corporation owned by the seller is then renamed or reverts to its original numbered status.
An asset sale is very desirable to a buyer because it means the buyer will start with a clean corporation, without history, and no worries about contingent liabilities. For the seller, there can be significant tax implications, mainly because the only way to get the sale proceeds into your personal possession is to either dividend them out or charge a management fee to the corporation you still own, both of which are highly taxable.
An asset sale can often be a very complicated transaction. Detailed allocations to asset values need to be negotiated and employees must be let go from the prior corporation and re-hired, often causing tenure issues. In addition, all utilities, contracts, etc. have to be re-assigned to the new entity, credit inquiries may be performed on the new owner, and covenants from the new owner may also be requested.