What is the difference between buying SHARES and ASSETS of a business?
Oct 03, 2017
Most business owners who are in the process of buying a business do not think about whether they are buying the assets of the business or the shares. They tend to think about the price, terms of payment and closing date, all of which are important of course.
Here are some helpful tips below to help inform this choice:
You need to know the legal structure of the seller or vendor. Ask this up front. You can only buy SHARES of an incorporated company and not of a sole proprietorship or partnership. If you are buying from a sole proprietorship or partnership, you are buying assets.
- The seller usually wants to sell the shares of an incorporated company to take advantage of the lifetime capital gains exemption.*
- If the buyer buys the shares of an incorporated company, it takes on all past liabilities of the company, which may include liabilities of many types including tax, CPP, EI, WCB, judgements, bad credit with suppliers. Careful due diligence is required. The price should reflect both known liabilities and the possibility of unknown or hidden liabilities.
- If the buyer buys assets of the business (whether incorporated or not), the buyer and the seller can pick and choose which assets are to be sold. The whole business does not need to be sold to the buyer. The parties can also more carefully select what liabilities will be assumed by the buyer and which ones will stay behind with the seller.
- If the buyer buys some of the assets (but not at least 90%), the buyer may need to pay HST on the purchase price. You should discuss this with your accountant, but this could be a cash flow issue (the HST would be credited as and likely refunded in a future HST return).
- If the buyer buys assets and wants to operate with the same business name, the business name will have to be transferred as one of the assets being purchased.
- If the buyer is buying assets, the buyer will be operating through a new legal entity after the closing date and will have open new accounts, supplier accounts, bank accounts etc. If the buyer buys shares of a company, this is not necessary as the business continues to operate under the same legal entity.
Generally as a buyer, you will want to buy assets of the business instead of shares, but if the price is right (and the company has a clean history), this could change.
One of the most important things to cover off in a purchase agreement is who will be responsible for which liabilities after the closing date. Make sure this is discussed and agreed to in sufficient detail to avoid future problems.
*Recent tax proposals would put some additional limits on this tax benefit for business owners selling their business. I think that this SUCKS! For more information on the proposed changes, you can watch an explainer video here.