Buying a Company's Assets vs. Its Shares: Key Differences Explained
Today, I’m answering a great question from Scott, who is looking to purchase a business in the United States. The seller wants to structure the deal as a share sale, while Scott prefers an asset sale. Scott also asked for specific tax advice, which I won’t provide because I’m not a CPA—but I will break down the differences between an asset sale and a share sale, as this is a common question for first-time business buyers.https://youtu.be/HgDLgwbXgj0
What Is the Difference Between an Asset Sale and a Share Sale?
To explain this clearly, let’s use an example:
Imagine Scott owns a small lawn care business called Scott's Lawn Care. He operates under Scott Corp Limited, which is a separate legal entity—a corporation. Scott Corp Limited owns assets, including lawnmowers, contracts, and possibly trademarks. If I, David, want to buy Scott’s business, there are two main ways I can do it:
1. Buying the Business Assets
If I purchase the assets, I am directly buying specific parts of the business, such as equipment, inventory, and intellectual property. This means:
I do not acquire the corporate entity, only its assets.
The seller in this case is Scott Corp Limited, not Scott himself.
I started a new legal business entity after purchasing the assets.
Any past liabilities of Scott Corp do not transfer to me, reducing my risk.
Scott Corp will still exist after the sale and will own the money I paid for the assets. Scott can withdraw the money personally over time to manage taxes.
From a tax perspective, an asset purchase can be beneficial for a buyer because assets can often be depreciated, providing tax advantages. Assets are supposed to transfer at a fair market value according to tax rules.
2. Buying the Business Shares
A share purchase means I acquire Scott Corp Limited itself rather than just its assets. This means:
I take ownership of the entire business, including its liabilities.
Contracts with customers, vendors, and employees remain intact.
Any past legal or financial issues of the business become my responsibility.
The ownership of assets does not change; rather, the entity that owns them does.
This is like when you might buy the shares of a big publicly traded company.
Sometimes, sellers prefer a share sale because in certain jurisdictions (such as Canada), selling shares can have tax-free benefits under capital gains exemptions. However, buyers typically prefer asset sales to avoid inheriting past liabilities.
Which Is Better: Asset Sale or Share Sale?
It depends on the situation:
Buyers usually prefer an asset sale to avoid liability.
Sellers often prefer a share sale due to potential tax advantages.
If the business has important contracts, licenses, or permits, a share sale may be better to avoid contract renegotiations.
If significant equipment has been depreciated, an asset sale might create a taxable recapture event for the seller.
Structuring the Purchase with a Corporation
Many buyers form a new corporation to buy either the assets or shares. This has benefits such as:
Lower corporate tax rates on earnings.
More efficient debt financing and repayment structures.
Protection from personal liability.
Legal and Tax Considerations
Regardless of the method chosen, consult a local CPA and attorney before making a decision. They can help:
Minimize tax liabilities.
Protect you from unforeseen legal risks.
Ensure contracts are properly transferred or renegotiated.
Final Thoughts
When buying a business, understanding whether to structure the deal as an asset sale or a share sale is crucial. Each method has advantages and risks. Be sure to seek professional advice to determine the best structure for your specific situation.
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Cheers, and see you next time!
David C. Barnett
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