When buying or selling a business, a common question that
comes up is whether to buy or sell the shares or the assets of the business.
For some people who are not familiar with this, the concept
can be hard to grasp. That’s why I made
this video to explain things in simple terms: https://youtu.be/HgDLgwbXgj0
Here’s an illustration.
Imagine that Mark owns a lawn maintenance company; Mark’s Lawns
Inc. Mark’s Lawns Inc. owns a tractor.
If you wanted to get into the lawn maintenance business you
could buy Mark’s Lawns Inc. The
ownership of the tractor doesn’t change.
It was and still is owned by Mark’s Lawns Inc. In this case, the seller is Mark. He’s selling the shares of the corporation to
you.
The other way to buy the business would be to buy the
tractor. In this case, Mark’s Lawns Inc.
is the seller. The ownership of Mark’s
Lawns Inc. doesn’t change. Mark will
still own this corporation after the transaction, the only difference is that
the company will have money in it instead of a tractor.
Because corporations are people under the law, a share sale
makes a new owner subject to liabilities to past events. An attorney will do their best to structure
warranties to try to protect a buyer but at the end of the day, a share sale
could expose a buyer to unwanted liabilities.
Asset sales are technically just the purchase of
‘stuff.’ In this regard a buyer doesn’t
necessarily have to worry about most of the past issues with the
corporation. Also there are usually tax
advantages for buyers who buy assets because equipment that may have been fully
depreciated by a seller may now appear on the buyer’s books at fair market
value and can be depreciated again by the buyer.
Seller’s know this and there is an equal tax disadvantage
vis-à-vis depreciated equipment. Also,
in some places, such as Canada, there is preferred tax treatment on the sale of
shares of an eligible corporation.
So when people ask me if they should buy or sell shares or
assets I tell them this: Buyers should try to buy assets, sellers should try to
sell shares but at the end of the day it doesn’t matter.
The type of transaction will form part of the
negotiation.
Let me give you a simple example. A seller wants $250,000 for their
business. A buyer offers $200,000. The seller says that they can’t go that low
unless the buyer is willing to purchase shares… a deal is struck.
The tax advantages/disadvantages of either form of sale are
known by both parties and can sometimes be estimated by both parties. As such, it just comes down to dollars and
cents in most cases.. unless there are specific reasons to buy shares such as
contracts, government regulation, etc… but that is a subject for another day.
If you’d like help to buy or sell a business, call me at
(506) 381-8416 or visit www.HowToSellMyOwnBusiness.com
or www.BusinessBuyerAdvantage.com
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isn’t much room left.. http://davidbarnett.eventbrite.ca
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Thanks and I’ll see you next time.
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