If you are considering selling a business you have to decide how to structure the sale. You do this by choosing whether to elect to structure the transaction as a share sale or an asset purchase sale.
There is one thing to consider if the business will sell while carrying on in the form of a company. This is if the transaction will be a sale of shares or a sale of assets. Also, you should decide on this at the beginning of the sale process.
Purchasers tend to prefer to purchase a company through buying assets, not shares. This is because, through a share sale, the purchaser acquires the company in its entirety. They will get the assets this way, but they also get the business's liabilities. These liabilities may be unknown when closing the deal. But, with an asset sale, the purchaser only gets the assets. They will also only assume the liabilities that have been identified already. These liabilities are then listed in the purchase agreement and have been negotiated between both parties.
A purchaser will try to avoid taking on hidden liabilities and potential risks. As a result, this is the main reason why a purchaser will insist on purchasing the business through an asset sale.
Advantages of share sales for sellers The seller will want to shift any liabilities onto a prospective purchaser. This is also the reason why a seller will insist on the structure of the transaction to be a share sale. As a result, both parties will want to negotiate certain residual liabilities for a set amount of time after the deal closes. This is also to avoid any misunderstandings.
Choosing a sale of assets or a sale of shares will affect the price of the business. Also, it will affect the price the purchaser is willing to pay for the business. It will also affect the price the seller is willing to receive with regards to liabilities and tax advantages on either side. For example, a buyer in a share sale wants to discount the price of the business. This is because of the risk of contingent liabilities. The seller is willing to accept the discounted price for the share sale under certain conditions. Those conditions are that the share sale is roughly equal to the seller's available capital gain exemption. We will discuss capital gain exemptions in further posts.