Buying a Business: Should You Negotiate for Assets or Shares?

[Updated Sept. 7, 2016.] Buyers usually prefer to purchase the assets of the business including intellectual property, the right to use the name, telephone number, websites and all the tangible assets. If purchasing the assets at market value the buyer may be able to achieve a greater depreciation expense going forward and reduce their taxes in future years.

If they purchase shares rather than assets they inherit liabilities. An audit next year of last year’s tax return and financials may result in a liability to Revenue Canada. A previous employee may sue the company for wrongful dismissal or for an injury sustained on the job.

There may be product liability issues.

Sellers tend to prefer a share purchase as this structure enables them to take advantage of the $800,000 capital gains tax exemption ($824,177 indexed by a factor of 1.013 for 2016), provided their business qualifies. This may save them considerable taxes.

The buyer may be prepared to accept the possibility of hidden liabilities if the seller is prepared to provide significant financing for their purchase and they include a right of offset in the note. To some extent this will depend upon the exposure and risk the buyer is assuming.

If the seller has been conservative and meticulous in their record keeping and taxes, the buyer is in a position to negotiate the structure of the transaction. For instance, in return for agreeing to accept a share structure and lose the tax shield against future earnings, the buyer may negotiate increased financing from the seller and perhaps a lower price. This enables the buyer to share in the benefit the seller achieves through a share sale.

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Gregory Kells
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