Our Blog

There are over 1.23 million businesses in Canada, and many of these may be for sale by their owners. This is a natural part of the business cycle, so prepare to deal with this eventuality if you are an owner.

You might downsize, move, or just be ready to retire. Regardless of your reasons for wanting to sell, figure out if you want to sell the entire company or just a division. The answer isn’t as simple as it might seem at first glance.

There are two ways to sell a business: an asset purchase and a share purchase. The type of business transaction you choose will impact the price you receive, the taxes you pay, and the liability you assume.

Making an informed decision will ensure that when the time comes to sell your business, you’ll be happy with the results. Here’s a look at the key differences between these two transactions.

What Is an Asset Purchase?

Asset purchases involve buying everything the business owns, including:

  • Real property (buildings)
  • Personal property (equipment and inventory)
  • Intangible assets (intellectual property)
  • Goodwill

In an asset purchase, the purchasing company is not liable for debts incurred by the seller. However, there are exceptions to the rule. For example, when a buyer agrees to assume debts or liabilities for a lower sales price.

What Is Goodwill?

Goodwill represents the difference between what you purchase a company for and its actual net fair value—the worth of its tangible assets minus all liabilities associated with them. Some factors that create goodwill for a company include its brand name, dedicated customer base, and proprietary technology.

Pros of an Asset Purchase

Outside of acquiring business assets without taking on any associated risk, there are other benefits such as:

  • No securities filings
  • Option to buy some or all of the assets
  • Avoid any issues with the remaining shareholders of the seller
  • Ability to depreciate goodwill over time
  • Choice to “step up” the tax value of those assets
  • Option for buyers to complete due diligence faster and at a lower cost

Cons of an Asset Purchase

One of the primary disadvantages of an asset purchase is that you could inherit a lot of risks. You will be liable if there are any problems with the assets, such as defects.

Another drawback is that it’s hard to determine the value of certain intangible assets like goodwill. This can make it difficult to negotiate a fair price.

There are also some other negative aspects:

  • Assets will need to be re-titled
  • No guarantee that the assets will continue to generate profit
  • Extra authorization to take over contracts that are not transferable
  • Sales or transfer taxes associated with the purchase of assets

What Is a Share Purchase?

In a share purchase, the purchaser gains stock in a business and thus becomes an owner. The purchaser would not own the business or its assets directly but through ownership of shares in a company.

The company would remain a legal entity with all its liabilities and rights. It would keep any tax history or lawsuits it had accrued as well.

Pros of a Share Purchase

A share purchase has a few advantages over an asset purchase:

  • No re-valuations or title changes after the initial purchase
  • Non-assignable licenses and permits do not need approval
  • More common and simpler to use than asset acquisitions

Cons of a Share Purchase

Here are some disadvantages of a stock purchase:

  • No “step-up” tax advantage
  • Cannot handpick assets
  • Liabilities transfer at their current value
  • Relevant securities laws apply
  • Goodwill is not tax-deductible
  • Share price may rise to cover existing liabilities of the company

Which Business Transaction to Choose

Typically, stock sales benefit sellers, while asset sales favor buyers for tax purposes. When all things are equal, businesses sell for more when they’re sold as a collection of assets rather than stocks. However, it all depends on what your objectives are.

For example, a seller may want to keep the company name and goodwill associated with it. In such cases, making an asset purchase that excludes these items may be better.

Some buyers may want to start a company, so a stock purchase is one option for accomplishing such an endeavor.

Tax Implications for the Seller

When an individual sells their stock, they are taxed only on 50 percent of their gain. On the other hand, when a company sells assets, the owner will have to pay taxes on 100% of such gains.

Capital Gains

Individual shareholders may reduce or even eliminate the tax on capital gains by using their Lifetime Capital Gains Exemption (LCGE). This is usually only available in a share purchase.

Profit Distribution

In an asset sale, the proceeds from selling assets are used to settle the liabilities of a company before any money is distributed to shareholders. Shareholders in a share sale receive profits directly from their purchaser and do not need to use other shareholders’ tax plans.

Purchase Price

In an asset sale, some of the purchase price may be taxable income rather than capital gains. The tax cost of capital gains that are distributed to individual shareholders is higher than the taxes on other types of income.

Tax Implications for the Buyer

An asset purchase frees the buyer from the liabilities of a company, including tax obligations. Of course, this excludes taxes on any liabilities the buyer chooses to take on.

A share sale comes with tax obligations but increases the benefit of deductions and tax credits that the buyer can claim.

Taxes After Closing

When a purchaser buys shares in a target company, they may need to reorganize the business’s assets. For instance, they may transfer certain divisions or product lines from one affiliate to another. This could cause additional tax liabilities to be realized on that sale, which otherwise would not be an issue if only physical assets were involved.

For asset purchases, if there were no “step-ups” in the tax cost and those assets were removed from that corporation later, a second layer of taxation would come into play.

Tax Shields

When a buyer buys an asset and takes over its existing depreciation schedule, the buyer enjoys higher expected future tax deductions. When a company is sold in a share sale, buyers lose the right to claim depreciation on assets gained, even if such assets were used by the seller. Therefore, they cannot expand the tax shield created by depreciation.

Purchasers who insist on an asset sale may be asked to pay more than the asking price. This is to make up for any tax loss that sellers incur because of losing long-term capital gains exclusions. A hybrid sale option may fill the gap for both parties and allow them to avoid a complete loss.

Hybrid Sale

Selling both shares and specific business assets can allow the seller to take advantage of their LCGE, while partially increasing the tax cost of purchased assets for the buyer.

Here is a simplified example of a common hybrid sale approach works:

A seller sells their shares to an individual for more than they paid to capture the LCGE. The seller transfers assets with a gain, allowing the buyer to have a stepped-up cost basis. The buyer then combines shares and individual assets via reorganization, which allows for tax savings.

A Note About Due Diligence

Before buying shares or assets, a business should do a due diligence check. Due diligence is the process a potential investor goes through to learn as much as possible about a business or individual before investing in them. It includes data about sales, the shareholders, and potential connections to forms of economic crime.

Some factors potential investors should look at are:

  • Reports from the press
  • PEP
  • Lists of sanctioned groups
  • Budget
  • Work processes
  • Employee qualifications
  • Production output
  • Quality

Due diligence is a complicated process, so it’s wise to call on trained staff or external advisors for help.

Prepare Yourself for Your Business’ Future

It’s important to be aware of the benefits and drawbacks of each type of sale, and it’s difficult to know which one is best for your business. Each business transaction is unique, so what you prefer may not be the best way to achieve your goals.

Before signing on the dotted line, get help from one of our experts here at Minhas Lawyers. We’ll help you decide which method of sale is best for you, then provide the legal expertise to ensure your transaction goes smoothly from beginning to end.


Please follow and like us:

Minhas Lawyers Professional Corporation is a multi-practice law firm based in Mississauga. We advise and represent clients across various segments and practice areas.

Follow Us On

Business Hours

Opening Days :

Monday – Friday:
9:00 am to 6:00 pm

Saturday - Sunday:
Book Appointments Only

Contact Us

Phone and Fax

(905) 671-9244

(905) 671-9245

Email Address



145-2960 Drew Rd,
Mississauga, ON L4T 0A5