Understanding the Key Parties
Before diving in, it’s important to recognize that most businesses are owned by corporations, not individuals directly. So while you may be negotiating with a person, the business itself likely exists as a separate legal entity.
For example:
What Is an Asset Sale?
In an asset sale, the buyer purchases selected assets of the business—such as equipment, trademarks, websites, customer lists, etc.—directly from the corporation.
Pros for the Buyer:
Clean slate: You start fresh without taking on past liabilities.
Tax benefits: Assets can be depreciated from their new purchase value.
Flexibility: You pick and choose which assets and liabilities to assume.
Example:
David buys the lawnmower, trade name, and customer list from Scott Corp Ltd.
He forms a new company to operate the business. Scott still owns Scott Corp, but now it just holds the sale proceeds.
Tax Note:
Scott may face a second layer of taxation when he pulls the sale proceeds out of Scott Corp (dividends or salary).
What Is a Share Sale?
In a share sale, the buyer purchases the shares of the business entity itself—meaning they take ownership of the whole company, including all assets, contracts, and liabilities.
Pros for the Seller:
Cleaner exit: Seller walks away with fewer post-sale obligations.
Tax benefits (in some jurisdictions): In Canada, for example, share sales of eligible small businesses can be tax-free.
Risks for the Buyer:
Liability exposure: You inherit all past obligations, lawsuits, and debts.
No asset depreciation reset: Assets remain on the books at their historical value.
Example:
David buys 100% of Scott’s shares in Scott Corp Ltd.
All contracts remain intact. The lawnmower and liabilities stay where they are. But now David owns the corporation, and thus any lawsuits stemming from past work also land on his desk.
Why Buyers Prefer Asset Sales
Most small business acquisitions—especially under $500,000—are done as asset sales. Here's why:
They reduce legal and financial risk.
The buyer has more control over what they’re taking on.
It simplifies negotiations with lenders and insurers.
When Share Sales Make Sense
That said, share sales can be advantageous when:
The company holds licenses, permits, or long-term contracts that can’t be easily transferred.
There are bonding certificates or regulatory approvals tied to the business entity.
The seller is willing to accept a lower price in exchange for tax savings.
In these cases, buyers often ask for warranties and indemnities to protect themselves from pre-existing issues—backed by an escrow or legal mechanisms to enforce them.
Should You Use a Corporation to Buy a Business?
Absolutely—especially if you're borrowing money.
Here’s why:
Corporations generally pay lower tax rates than individuals.
If you borrow personally, you’ll have to take after-tax dollars out of the business to make repayments—making it more expensive.
Buying through a corporation allows you to reinvest and repay debt more efficiently.
Final Thoughts
There’s no one-size-fits-all answer. The structure of your deal should be informed by:
Legal advice
Tax planning
Your financing strategy
Your long-term goals
Whether you're buying a business or selling one, make sure you work with a qualified attorney and a CPA who understands your local laws and industry.
Additional Resources
Learn more in my Business Buyer Advantage course: businessbuyeradvantage.com
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