When buying or selling a business, one of the main considerations is whether to structure the transaction as an Asset Sale or a Share Sale. There are a number of considerations when making this important choice.
In an Asset Sale, the Purchaser only purchases certain assets of the target business, not the business itself. The sale can include a single asset, a group of assets or all of the assets of the target business.
An Asset Sale can be advantageous for the Vendor because they typically need to provide fewer representations and warranties in the sale agreement and can exclude certain assets that they wish to retain. The disadvantages for a Vendor in an Asset Sale can include the fact that it may require consents from third parties that may be difficult to obtain or additional registrations. On the Purchaser’s side, an Asset Sale may be advantageous because liabilities for the business are retained by the Vendor, a Purchaser can pick and choose which assets they want to purchase rather than having to acquire all of the target business’ assets and there may not be GST payable if the sale may be classified as a sale of a business as a going concern. An Asset Sale may be subject to the following disadvantages for the Purchaser. There may be more transfer taxes and registration fees. The Vendor may require that the Purchaser offers existing employees the same or similar terms as their existing employment. Finally, some assets such as licenses and permits may not be assignable.
In a Share Sale, the Purchaser usually purchases all of the issued and outstanding shares of the target company meaning that it is acquiring all of that company’s assets but also all of its liabilities.
A Share Sale may be advantageous for a Vendor because the purchase price may be higher if the company includes tax pools. Also, subject to any change of control provisions, all contracts, licenses and permits and their obligations and liabilities remain with the target company that would now be owned by the Purchaser. The disadvantages for a Vendor in a Share Sale may include the need to give extensive representations and warranties that may result in litigation later on if they are not true or don’t become true as promised. A Vendor may also need to provide indemnities that will oblige them to protect a Purchaser down the road from certain losses. A Share Sale can be advantageous to a Purchaser if the target company has valuable good will or a good reputation in the market. Given that the Purchaser acquires the whole target company, including their name, this may be of great value to the Purchaser.
If you are considering buying or selling a business, contact Hendrix Law to assist you in closing the deal while ensuring your interests are protected.