When a business owner decides to sell his or her company, it is
usually after considerable deliberation, over a long period of time.
Once this monumental decision has been made, many factors come into
play, not the least important of which is how the sale will be
structured. There are two different ways that business sale
transactions occur. The first is to sell the assets of the
business, and the other is to sell the shares of the business.
While the end result is the same, that a buyer will ultimately own
and operate your business, the form or structure of each type of
transaction is very different. Usually sellers prefer share
deals, and buyers tend to prefer asset transactions. Why is
that? How do deals ever get done?
The reason why each party prefers a different form of transaction is
simply because there are distinct advantages to have it structured
in their preferred form. A seller, if an individual, will
typically prefer to sell shares of the corporation, as the tax
implications are considerably better than for an asset sale.
When you sell your business, it is not the sale price that matters
but rather the amount of money left in your pocket after Revenue
Canada collects its share. When you sell the shares of your
company, if you are a Canadian resident, own a Canadian small
business corporation and use substantially all of your assets (90%
at the time of sale and 50% for the past 2 years) actively in your
business then your shares may qualify for the small business capital
gains exemption. What this means is that the first $750,000 of
capital gains (was $500K prior to March 2007) will be tax-free!
This is a phenomenal benefit. This exemption is not available
for corporate shareholders. To qualify for the capital gains
exemption, you or an immediate family member must have owned the
shares for the past 2 years. The balance of any capital gains
will be taxed at a lower rate because only 50% (used to be 75% then
66%) of the capital gains get included in income.
Buyers prefer to buy assets for a few main reasons. The first
is liability. Once the shares of a corporation are purchased,
the new owner becomes responsible for any liability that may arise
against the corporation, whether it was before or after they
purchased the shares. The Buyer will likely protect themselves
against liability that arise when the company operated under the
Seller’s watch (by getting personal representations and warrants),
but the Buyer still must sue the Seller for the damages if the
Seller does not pay because the third party will sue the
corporation, which the Buyer now owns. The second reason
that Buyers want to purchase assets is because they are able to
step-up the value of assets to their fair value from their book
value, and then take depreciation write-offs against any future
income earned. This is different from a share purchase where
the Buyer inherits a low basis for depreciation. Also, if
there is an excess of purchase price over the fair value of the net
assets acquired, then goodwill is created which can also be written
off over time. There is no business write-off available in a
share transaction. Lastly, the Buyer can selectively purchase
only the assets they want, leaving behind anything deemed
undesirable, for whatever reason.
With such a difference in opinions, how do deals ever get done?
The main reason is because both parties have an interest in doing
so, even if certain compromises have to be made. The Buyer may want
to buy the company because of the market they are in or their
customer base, and can be convinced to buy shares. The Seller
can often command a higher price in an asset deal, and thus may be
convinced to sell assets if it means getting more for their company
than they expected. Ideally there will be more than one buyer
vying for the seller’s business, and in such a competitive
atmosphere, the motivated buyer will put aside the desire to only
purchase assets. Employing an expert intermediary to negotiate
on your behalf will ensure that whether an asset or share deal is
consummated, nothing will be left on the table.
In summary, sellers usually want to sell shares and buyers usually
want to buy assets. If both parties want to do a deal, they
will come to some negotiated agreement regarding what form the
transaction will take. Regardless of the negotiated sale structure,
the outcome is the same. At the end of the process, the Buyer
purchases the business from the seller, and after the closing date,
becomes responsible for operating the business. Progressing
from step one of the process, deciding to sell, to the closing day
and beyond, can be a lengthy, emotional and arduous process. Do your
homework, and obtain expert assistance if at all possible.
Rhonda
Downey is the President of Regelle Partners Inc. , a mergers and
acquisition firm with a niche focus in the Canadian
security industry. We specialize in
helping business owners sell their companies
by initiating and managing the business sale transaction.
