Asset Sale vs. Share Sale. What are the Differences and What are the Tax Implications of Each?

When it comes to selling a business, there are generally two options available: an asset sale and a share sale. Each option has its own advantages and disadvantages, and the choice between the two will depend on a number of factors, including the goals of the seller, the structure of the business, and the tax implications of the sale.

Asset Sale vs. Share Sale

What is an Asset Sale?

In an asset sale, the buyer purchases the assets of the business, such as databases, inventory, intellectual property, and goodwill. The seller retains ownership of the legal entity, which is usually dissolved once the sale is complete.

What is a Share Sale?

In a share sale, the buyer purchases the shares of the business, which represent ownership in the legal entity. The buyer assumes ownership of all the assets, liabilities, and obligations of the business.

Asset Sale

One of the main advantages of an asset sale for the seller is that it allows them to retain ownership of the legal entity. This can be beneficial if the seller has other assets or liabilities that they wish to keep separate from the business.

Another advantage of an asset sale is that it can be easier to negotiate the sale price. This is because the buyer is only purchasing the assets that they want, and can leave any unwanted assets or liabilities behind. This can be particularly beneficial if the business has significant liabilities that the buyer is not willing to assume.

Pros of an Asset Sale

1. Reduced Liability: One of the primary benefits of an asset sale is that it limits the buyer’s exposure to potential liabilities associated with the business. Since the buyer is only acquiring specific assets and not the entire company, they can choose which liabilities they want to take on and which ones they want to avoid. This can be particularly advantageous for buyers who are concerned about potential legal or financial liabilities associated with the business.
2. Tax Benefits: Another potential advantage of an asset sale is that it can be more tax-efficient for the seller. In an asset sale, the seller can allocate the purchase price among the assets being sold, which can result in lower capital gains taxes. Additionally, any losses associated with the sale of the assets can be used to offset other capital gains, further reducing the tax burden for the seller.
3. Greater Flexibility: Since the buyer is only acquiring specific assets, there is more flexibility in the negotiation and structuring of the deal. The seller and buyer can agree on which assets are being sold and which ones are being retained, and can negotiate the price for each asset individually. This can be particularly advantageous if there are certain assets that the seller wants to retain or if there are specific assets that the buyer is particularly interested in acquiring.

Cons of an Asset Sale

1. Reduced Value: One potential disadvantage of an asset sale is that it can result in a lower purchase price for the seller. Since the buyer is only acquiring specific assets, they may be less willing to pay a premium for the business as a whole. Additionally, the seller may need to sell certain assets at a discount in order to facilitate the sale, which can further reduce the overall value of the transaction.
2. More Complex: An asset sale can be more complex than a share sale, as there may be a large number of individual assets that need to be transferred. This can require additional legal and accounting fees, which can further reduce the overall value of the transaction.
3. More Time-Consuming: Since there are more individual assets that need to be transferred, an asset sale can be more time-consuming than a share sale. This can result in additional delays and expenses for both the seller and the buyer.

Share Sale

Pros of a Share Sale

1. Simpler transaction: A share sale involves the transfer of ownership of the company to the buyer, which can be a simpler transaction than selling individual assets. This is because it avoids the need to negotiate and document the transfer of each asset.
2. Tax advantages: In some jurisdictions, share sales can be more tax-efficient than asset sales. This is because the sale of shares may be subject to a lower tax rate than the sale of assets. Seek legal advise on your specific circumstances. 
3. Retention of liabilities: In a share sale, the buyer typically takes over all of the liabilities and obligations of the company, rather than just those associated with the assets being sold. This means that the seller may be able to avoid any ongoing liability for the business after the sale.

Cons of a Share Sale

1. Lower sale price: Buyers may offer a lower price for the company in a share sale because they will be taking on all of the company’s liabilities and obligations.
2. Reduced control: In a share sale, the buyer becomes the new owner of the company, which means that the seller may lose control over the business after the sale.
3. Due diligence: A share sale typically requires more extensive due diligence by the buyer, which can be time-consuming and costly for the seller. The buyer will want to ensure that they are fully aware of all liabilities and obligations of the company before purchasing the shares.
4. Approval requirements: In some jurisdictions, the sale of shares may require the approval of a greater number of parties, such as the board of directors, shareholders, or regulatory authorities. This can add complexity and time to the transaction.

What are the Tax Implications?

One of the most significant differences between an asset sale and a share sale is the tax implications for both the buyer and the seller.

Tax Implications of an Asset Sale

In an asset sale, the seller may be subject to taxes on the gains from the sale of each individual asset. For example, if the seller sells a piece of equipment for more than its book value, they may be subject to capital gains tax on the difference.

The buyer may also be subject to tax implications in an asset sale. When purchasing assets, the buyer may need to allocate the purchase price to each asset based on its fair market value. This can result in different tax consequences for the buyer depending on the asset.

For example, if the buyer purchases a piece of equipment for more than its fair market value, they may be subject to depreciation recapture tax. Depreciation recapture is a tax on the difference between the purchase price and the adjusted tax basis of the asset.

Another example of a tax implication in an asset sale is the allocation of the purchase price to goodwill. Goodwill is an intangible asset that represents the value of a company’s reputation, customer base, and other non-physical assets. When an asset sale includes the sale of goodwill, the buyer may need to allocate a portion of the purchase price to this asset. This allocation can have significant tax consequences for both the buyer and the seller.

Tax Implications of an Share Sale

In a share sale, the tax implications for the seller and buyer are generally more straightforward. For the seller, the proceeds from the sale of the shares are subject to capital gains tax. The tax rate on capital gains can vary depending on a number of factors, including the length of time the shares were held and the seller’s income tax bracket.

For the buyer, the cost of the shares can be added to the tax basis of the business entity. This can have significant tax benefits for the buyer, as it can reduce the amount of taxable income for the business in future years.

One example of a tax benefit for the buyer in a share sale is the step-up in tax basis of the assets of the business. When the buyer purchases the shares of a company, the tax basis of the assets is adjusted to reflect the purchase price of the shares. This adjustment can result in a higher tax basis for the assets, which can reduce future tax liabilities for the business.

Conclusion

In conclusion, there is no one-size-fits-all answer to the question of whether an asset sale or a share sale is better for a seller. The choice between an asset sale or share sale will depend on a number of factors, including the goals of the seller, the structure of the business, and the tax implications of the sale. It’s important to carefully consider all of these factors and to work with experienced professionals to ensure that the sale is structured in a way that meets the needs of both the buyer and the seller.