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Steve Skrlac, MBA, CFA - Broker of Record
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Some Advantages to a Seller of a Share Sale When Selling a Business
The term “share sale” may be a term that a business seller has heard when inquiring about the process of selling a business. In Ontario, Canada it differs in many important ways from an “asset sale” which is governed under the Bulk Sales Act. It is important to talk to your accountant and layer to fully understand the difference between the two. Below is a summary of some reasons why a share sale may be advantageous from a seller’s perspective.
Tax treatment of the proceeds of the sale
Taxation issues are the key advantage typically cited by business owners for a share (or “stock”) sale. Some usual reasons are that the treatment of the gain realized during a sale may be taxed at the capital gains rate. Also, depending on the number of shareholders in the company and the extent of their lifetime exemption for capital gains, a business owner can save significantly on the tax bill on sale.
Contracts with customers
If there exist important contracts with customers that both buyer and seller do not wish to disturb, a share sale may be the preferred option. As an example, a company that has service maintenance contracts in place with its customers may not want to go through the process of transitioning them to a new owner from the standpoint of customer communication. Perhaps the contracts stipulates that the client must give consent in order for them to be assigned or perhaps the new owner simply wishes to do a soft transition. There is the possibility that if the contract is with the “company” then an assignment does not need to take place. If the buyer of the business for sale purchases the shares then he or she is getting the contract obligations as part & parcel of the deal too.
Taxation issues are the key advantage typically cited by business owners for a share (or “stock”) sale. Some usual reasons are that the treatment of the gain realized during a sale may be taxed at the capital gains rate. Also, depending on the number of shareholders in the company and the extent of their lifetime exemption for capital gains, a business owner can save significantly on the tax bill on sale.
Contracts with customers
If there exist important contracts with customers that both buyer and seller do not wish to disturb, a share sale may be the preferred option. As an example, a company that has service maintenance contracts in place with its customers may not want to go through the process of transitioning them to a new owner from the standpoint of customer communication. Perhaps the contracts stipulates that the client must give consent in order for them to be assigned or perhaps the new owner simply wishes to do a soft transition. There is the possibility that if the contract is with the “company” then an assignment does not need to take place. If the buyer of the business for sale purchases the shares then he or she is getting the contract obligations as part & parcel of the deal too.
Difficult landlords
A share sale may be advantageous in a scenario where the landlord of the premises where the business resides is not being co-operative. Perhaps the landlord uses this as a way to hold up a deal or try to get a rent increase, or even a vacancy, then a share sale may be an option. Again, if the lease is structured in an appropriate manner, a share sale may be a way to get around a tough landlord. Obviously consult with an attorney though.
Financing
In a sale of shares, the buyer typically buys the entire entity. Looking at the balance sheet, this might have some built in long-term financing or favourable working capital terms in place. As an example a company may have some excellent equipment loans on the books or a very favourbale business line of credit. If this is the case, and if it is especially hard for an individual buyer to obtain similar terms, then there may be a compelling arguement to buying shares. It can be perceived as a turn-key business buy.
Recourse to follow the corporate entity
When shares are sold, more of the recourse follows the company as it would in an asset sale (under the Bulk Sales Act). This may be advantageous to a business seller. For instance, in a business where the risk of running the business is built into the return of buying the business (such as in a business with environmental risk exposure) then perhaps the seller will want to have a buyer to take over the built-in company risk via a stock sale.
The key point is that there is no balck & white answer whether or not a sale of shares is advantageous to the seller. It truly does depend on the deal. There are times where it may be a deal breaker and others where it is the only avenue available to get the transaction completed.
Again, these are but a few scenarios where it might make sense to structure a deal as a sale of shares. An ethical business broker will always direct you to consult with your C.A. and attorney for advice.
A share sale may be advantageous in a scenario where the landlord of the premises where the business resides is not being co-operative. Perhaps the landlord uses this as a way to hold up a deal or try to get a rent increase, or even a vacancy, then a share sale may be an option. Again, if the lease is structured in an appropriate manner, a share sale may be a way to get around a tough landlord. Obviously consult with an attorney though.
Financing
In a sale of shares, the buyer typically buys the entire entity. Looking at the balance sheet, this might have some built in long-term financing or favourable working capital terms in place. As an example a company may have some excellent equipment loans on the books or a very favourbale business line of credit. If this is the case, and if it is especially hard for an individual buyer to obtain similar terms, then there may be a compelling arguement to buying shares. It can be perceived as a turn-key business buy.
Recourse to follow the corporate entity
When shares are sold, more of the recourse follows the company as it would in an asset sale (under the Bulk Sales Act). This may be advantageous to a business seller. For instance, in a business where the risk of running the business is built into the return of buying the business (such as in a business with environmental risk exposure) then perhaps the seller will want to have a buyer to take over the built-in company risk via a stock sale.
The key point is that there is no balck & white answer whether or not a sale of shares is advantageous to the seller. It truly does depend on the deal. There are times where it may be a deal breaker and others where it is the only avenue available to get the transaction completed.
Again, these are but a few scenarios where it might make sense to structure a deal as a sale of shares. An ethical business broker will always direct you to consult with your C.A. and attorney for advice.
