We can’t live forever, but our businesses can. With the right structure in place, a business can carry on long after we are ready to retire – whether it is carried on by our family, employees, or an arms-length purchaser. The problem is that most owners don’t often make advanced plans for when it’s time to make their exit.
According to a 2018 report from the Canadian Federation of Independent Business, 81% of small business owners were looking to retire within the next decade, but over half of business owners had absolutely no succession plan in place. Many of the owners interviewed had at least some informal plan to sell their business, but the reality is that most would be unsure how to even go about making such a move.
While there are many steps to business succession planning, one of the first things that business owners can do is educate themselves on how best to sell a business. If they’re looking at potentially entering into a sale, they should know the difference between an asset sale and a share sale, and what each might mean for their future.
What is an asset sale?
In an asset sale, a purchaser is buying some or all of the assets of a business, such as a client list, intellectual property, real property, fixtures, furniture, trade names, inventory, etc. This sort of purchase can be buyer friendly, because, in theory, a buyer can cherry-pick which assets they would like to purchase and can leave other liabilities in the hands of the seller, such as the termination of employees or lawsuits. However, this type of acquisition may lead to prolonged negotiations related to the status of the purchased assets. For example, a seller will generally prefer to sell assets “as is”, but a buyer would prefer extensive representations and warranties regarding the quality, health or longevity of the assets.
Ultimately buyers often prefer an asset sale because it is the less risky of the two options. Buyers usually have a clear view of the company’s assets and can negotiate which liabilities they will choose to assume before anything changes hands.
What is a share sale?
In a share sale, the purchaser buys not just the assets, but also all of its liabilities, and takes over the business as is – subject to the negotiations leading up to the closing. This can sometimes mean a lower purchasing price for sellers, because buyers may assume some increased risk. However, it also increases the incentive for the purchaser to complete due diligence on the target corporation. Since the whole of the company changes hands, the buyer will want to know exactly which liabilities it is assuming and may want to have those liabilities dealt with by the seller prior to closing.
Why would I prefer one or the other?
The most important thing that business owners can do is give some serious thought to the process. This is not a decision that should be made lightly, or in the spur of the moment.
Take the time to work with your accountants and financial advisors to really take a holistic look at the overall financial health of the business, and your personal finances as well. You’ll want to structure the sale in a way that won’t be overly burdensome for the business and won’t wallop you with too many financial burdens as well.
There are other factors that need to be considered, such as the ability of the target corporation to disentangle itself from its assets. In a share sale, all of the assets remain with the company. This makes a share sale a somewhat simpler process than an asset sale, since some assets may have more complex ownership, and can involve transferring leases, contracts, licenses, permits, etc.
Ultimately, getting the right advice will help your sale go that much smoother. Aside from speaking with your financial team, a business lawyer will help guide you through your options and can work with you to determine which method is best for your interests. They can also represent you in your sale, and work with the buyer’s lawyers to make everything go as smoothly as possible.
At Pavey Law, our business lawyers have assisted clients with all kinds of business matters throughout the Cambridge, Kitchener, and Waterloo region. We know business inside and out, and we provide practical advice that keeps your interests top of mind. Contact us today to learn more about our services.