Asset Purchase Agreements & Share Purchase Agreements: Which Should You Choose?
There is an almost endless amount of factors that can affect how much a seller receives in a sale - valuations, negotiations, taxes, and more.
One of the most important factors is the structure of the sale. There are two principal ways of structuring a sale, and each has its own advantages and disadvantages for sellers and buyers. We’re going to compare and contrast these two sale structures, known as Asset Purchase Agreements (APA) and Share Purchase Agreements (SPA).
Asset Purchase Agreements (“APA”)
Asset Purchase Agreements are just what they sound like: an agreement by the buyer to purchase some or all of the assets of a business. APAs have their share of complexities - each asset must be individually itemized and sold to the buyer.
Everything, from the sale of physical assets to the transfer of employee contracts, must be negotiated in the asset purchase agreement. This can create additional complexities, as unionized and non-unionized employees may be treated differently under provincial legislation. Additionally, sellers will often ask that buyers offer their current employees similar contracts before going forward with the sale.
Pros for the seller
There’s usually less due diligence involved in APAs, as the buyer can simply select which assets they want. That means less exposure to potential liability on behalf of the buyer, which can mean a much quicker sale.
Additionally, the sale of assets means the seller keeps control of the corporate entity. This can be useful if the corporation owns real estate or other non-operational investments that the seller wants to keep under their control.
Cons for the seller
The cons for the seller more or less revolve around increased exposure to taxation. The seller cannot use the Capital Gains Exemption when using the APA structure. Additionally, the seller may be taxed on any cash withdrawn from the corporation once the asset sale is completed.
This can lead to some serious tax implications. Many sellers will actually offer a lower SPA sales price because, after taxes, they’ll still end up netting a higher profit with that sales structure.
Pros for the buyer
The main advantage of asset sales from the buyer’s perspective is threefold. First, the buyer isn’t exposed to any liability risk once the deal is closed - this differs from SPA sales, where the buyer takes on the liability of the corporation.
The buyer can also choose which assets they want to purchase - this can help them lower costs and reduce redundancy.
Finally, there can be financial advantages to the buyer if they can depreciate assets and goodwill at a faster rate than they would have been able to if the deal had been structured as a SPA. This varies from agreement to agreement, however, and depends on the net book value of the assets on the corporate entity’s balance sheet.
Cons for the buyer
While asset sales are GST exempt, the buyer must still pay PST on assets. Fortunately, no PST needs to be paid on goodwill - however, the assets portion of a sale depreciates more quickly than the goodwill portion of a sale.
The most important con, however, is that the buyer may risk losing key customers if new contracts need to be written with those customers. In SPAs, there’s no risk of losing key customers, as the corporation (and its contracts) are transferred to the buyer.
Share Purchase Agreements (“SPA”)
Share Purchase Agreements differ from APAs in that the seller’s shares are purchased - in Main Street business sales, the seller typically controls all of a business’s shares, and the SPA will transfer the entire corporation to the buyer.
Pros for the seller
As discussed above, the biggest pro for the seller is the ability to use the capital gains exemption - this significantly reduces the seller’s tax exposure.
Cons for the seller
The process of completing a SPA is much more involved than an APA, as the buyer will be on the lookout for potential exposure to liability. As such, there is a lengthy (and often revealing) due diligence process, which leads to higher legal fees for the seller.
Pros for the buyer
Buyers who are looking for a smooth transition and business continuity may prefer to structure the deal as a SPA. The continuity of employees, customers, contractors, vendors, leases, and more is basically guaranteed, as the corporation is transferred wholesale to the buyer.
Cons for the buyer
The biggest pro is, in this case, the biggest con, too. The continuity the buyer is looking for can be coupled with all kinds of liability concerns - the past and present legal concerns of the corporation become the buyer’s concern.
The buyer can mitigate this risk through the use of a holdback. With a holdback, a certain percentage of the sale price (usually around 10%) is withheld for a period of time (180 days to 5 years). If liabilities arise in that time (tax, legal, employee, financial, or otherwise), the costs associated with those liabilities can be paid for using the holdback.
Working with a Business Broker to Structure the Deal
As you can tell, the structure of a deal has important ramifications on the deal itself. Working with a business broker, like Jason Brice, can help you to better understand how the deal should be structured. There are other advantages, too:
The average legal bill for the Seller with a Share Purchase Agreement will be dramatically reduced with Jason Brice handling all of the legal negotiations in the Letter of Intent stage.
Interested in selling your business? Looking for more information? We can help. Visit our website at https://www.jason-brice.com/.