Introduction

When a business is being bought or sold in Ontario, one of the critical decisions that need to be made is whether the transaction will involve an asset purchase or a share purchase. Both methods have unique benefits and considerations, depending on the goals of the buyer and seller. In this article, we’ll explore the differences between asset purchases and share purchases, highlighting key factors that businesses should consider when deciding which method best suits their needs.

What is an Asset Purchase?

In an asset purchase, the buyer purchases specific assets and liabilities of the target business. These assets may include tangible items such as equipment, inventory, and real estate, as well as intangible assets like intellectual property, contracts, and goodwill. However, the buyer typically does not assume the business’s liabilities unless specifically negotiated.

Advantages of an Asset Purchase

1. Selective Acquisition: The buyer can choose which assets to acquire, allowing them to avoid undesirable assets and liabilities. This provides more control over the Legal commercial transaction and helps manage risks.
2. Tax Advantages: In many cases, asset purchases allow the buyer to allocate the purchase price to specific assets, which can provide tax benefits, including depreciation deductions.
3. Liability Protection: Since the buyer does not assume the target company's liabilities in an asset purchase, they are generally protected from any existing debts or legal claims associated with the business.
4. Easier to Secure Financing: Lenders may view asset purchases as less risky compared to share purchases, as the buyer is only acquiring specific assets and is not taking on the entire corporate structure.

Disadvantages of an Asset Purchase

1. Higher Taxes for the Seller: Sellers may face higher taxes in an asset sale because the proceeds from the sale are treated as income rather than capital gains. This can result in more significant tax implications for the seller.
2. Complexity in Transferring Assets: Transferring assets, such as real estate or intellectual property, may involve complex legal and administrative processes.
3. No Continuity of Ownership: The buyer does not acquire the target company as a going concern, meaning they may need to renegotiate contracts and licenses and establish new relationships with employees, suppliers, and customers.

What is a Share Purchase?

In a share purchase, the buyer acquires the shares or ownership interests of the target company. The business itself, including all its assets and liabilities, continues to operate under the same corporate structure, but with new shareholders.

Advantages of a Share Purchase

1. Continuity of Business Operations: The business remains intact, and contracts, licenses, and relationships with customers, employees, and suppliers are typically not disrupted. This is particularly important for businesses with long-term relationships or ongoing contracts.
2. Potential Tax Benefits for the Seller: Sellers may benefit from capital gains tax treatment on the sale of shares, which is generally more favorable than the tax treatment on asset sales.
3. Simplicity of Transfer: Since the buyer acquires the shares of the company, there is no need to transfer individual assets, which can simplify the process.

Disadvantages of a Share Purchase

1. Assumption of Liabilities: In a share purchase, the buyer assumes all liabilities, including potential legal claims, outstanding debts, and any other obligations tied to the business. This includes both known and unknown liabilities, making it a riskier option.
2. Limited Control Over Asset Selection: Unlike in an asset purchase, the buyer cannot choose which assets or liabilities to acquire. They inherit all the company’s existing obligations and assets.
3. Complicated Due Diligence: Share purchases require extensive due diligence to identify all liabilities and ensure that the business’s financial and legal standing is sound.

Choosing Between an Asset Purchase and a Share Purchase in Ontario

Deciding between an asset purchase and a share purchase depends on several factors, including tax considerations, the nature of the business, the preferences of both the buyer and seller, and the risks associated with liabilities. Buyers and sellers should work with experienced legal and financial advisors to carefully evaluate the advantages and disadvantages of each approach to ensure that the transaction aligns with their goals and minimizes potential risks. If you're considering buying or selling a business in Ontario and need help understanding the differences between asset and share purchases, contact LexCounsel. Our team can guide you through the process to ensure you make informed decisions that protect your financial and legal interests.