Asset Purchase Transactions
Asset Purchase Transactions will typically involve the sale of all assets that are owned by a corporation including without limitation inventory, furniture, customer lists, supplier lists, trade names, equipment, machinery, intellectual property such as patents, domain names, etc.
One corporation (ie Purchaser) will typically buy all the assets of the selling corporation and the advantage is that the purchaser can decide which assets it wishes to purchase and liabilities are typically excluded from the transaction. This arrangement provides the Purchaser with greater flexibility to pick and choose the assets desired.
Asset purchase transactions can become complex very quickly as the assignment of agreements are usually required, which most commonly includes the assignment of a lease agreement for the premises where the business operates from. If the business owns real property, then a conveyance of that property may also be required if the real property is included as one of the assets being sold.
An important element of distinction between an asset purchase transaction and a share purchase transaction is that employees are treated very differently as employees are not considered assets in an asset purchase transaction and as such the employee agreements are not assignable. As a result, employees are usually terminated in an asset purchase transaction by the Seller and any applicable employee benefits are paid out at the time of the closing of the transaction. The Purchaser after closing is then free to enter into new agreements with the employees.
However, in a Share Purchase transaction the employees will simply continue working in the same manner and capacity as if nothing changed because the purchaser in a share purchase transaction steps into the shoes of the Seller and assumes all the responsibility and benefits of the previous owner.
Share Purchase Transaction
A share purchase transaction is the sale of all the shares of the owner or part owner of a corporation. In essence, when you transfer all the shares in a corporation to a buyer, the buyer assumes all the assets and all the liabilities of the Corporation and the level of due diligence required becomes substantially more complex as many of the liabilities, contracts, regulatory implications are unknown to the purchaser. For example, in a share purchase transaction the corporation may have tax liability, HST liability or a pending investigation by a government agency such as the Ministry of the Environment for violations of the Environmental Protection Act.
Tax implications
A share purchase transaction can also have many tax advantages for the Seller as they can access their lifetime capital gains exemption from a share purchase transaction. The lifetime capital gains exemption (LCGE) as of June, 2024 is $1,250,000.00 and it continues to increase each year as a result of inflation.
This allows the Seller to reduce its tax liability. For example, a seller sells their clothing store business for $1,500,000 profit in 2024. This profit is considered capital gains and as such you would owe taxes on 50% of your capital gains. In other words in this example you would be taxed on $750,000 without accessing your LCGE.
If your business qualifies as a small business corporation then you may be able to access your LCGE and your profit of $1,5 million would be reduced by $1,250,000.00 (being LCGE). Therefore your capital gains would be reduced to $250,000 and considering 50% of capital gains is taxed then you would effectively pay taxes on $125,000 instead of $750,000.
The tax implications are substantial and as a result the interests of a Seller and Buyer are not aligned as most sellers wish to sell their business as a share sale transaction while most purchasers would prefer to purchase a business as an asset purchase transaction because they can avoid assuming many of the known and unknown liabilities of the corporation.
Conclusion
The decision to sell or purchase a business is a serious consideration that requires careful planning and expert advice. A lawyer will play a very important role in both transactions and will help you decide which structure is best for your particular circumstances.
The lawyers at Vakili Law Group have been advising individuals, development companies, real estate investment corporations, private lenders and small businesses for more than 15 years and will be happy to assist you with your matter as well. For more information feel free to schedule a free 15-minute consultation with one of our lawyers by clicking on the following calendar link: https://calendly.com/vlglaw/book-a-call-meeting