An experienced real estate agent may be able to explain the difference between the Asset Sale and Shares Sale, but most of them can't tell you the tax implications of each method to the seller and the buyer. If you are planning to sale or acquire a business, this article may give your a clear pictures of the difference of each method and tax implications.
What is the Seller's optimal goal of selling the business?
Maximize the selling price
Relieve from potential liabilities of the business
Minimize tax on the disposal
To maximize the selling price, sufficient marketing and adequate exposure time are extreme important. A good marketing strategy must be able to inform all active buyers, attract all inactive buyers, convert as many as impossible buyers to be the prospective buyers.
Shares sale has an advantage that can relieve the seller from potential liabilities in the future, but not existing liabilities. In general, after the buyer purchased shares of a company and acquired control of the business. All liabilities still stay with the business, the new owner assumed these liabilities. The seller get relieved.
There is a huge advantage for the seller to sell their business by using Share Sell - Lifetime Capital Gain Exemption! The seller will not utilize this advantage if hire a real estate agent to sell a business, because BC Real Estate Board only allows the agents to sell a business through asset methods. With assists of a professional accountant, they could use other tax tools to help sellers to minimize tax duty. For example, using the capital gain reserve to defer the tax, use a holding company to postpone the high personal income tax, use carrying capital loss, Asset Bump, and so on.
What is the Buyer's optimal goal of buying the business?
Transparency
Profitability
Avoid to assume any liabilities from the previous owner
Most buyer has a very simple goal when they start to look for a business, which is profitability. But in most scenario, the seller won't release any financial information before receive an offer. A knowledgeable agent is very important because they must be able added subject clause in the offer in order of collection financial information. If the financial report from the seller is too simple, the agent also need collect raw data from the seller and be able to reorganize and analyze the data.
As opposed to the seller, purchase only assets of the business from the seller is beneficial to the buyer because It helps to avoid to assume liabilities from the seller. However, it incurred GST and PST issue to the buyer. Properly filing this transaction with CRA is very important.
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