Are you looking to sell your Ontario business? Before entering into an Agreement of Purchase and Sale, there are a few things you should know. In this article, we’ll go through some basic information on M& transactions, the purchase/sale of assets vs. the purchase/sale of shares of a business, and the reasons why a seller may wish to sell the shares of their business, rather than its assets. Read on for answers to these important questions.
- What Is M&A?
- Asset Vs. Share Sale
- Why Would A Seller Want To Sell The Shares?
- Hummingbird Lawyers LLP Can Help
What is M&A?
Simply put, M& stands for mergers and acquisitions. M& describes the act of consolidating multiple businesses, or the shares/assets of a business, through a variety of different financial transactions. Whether it’s a restaurant or a software business, M& transactions are often complex and require a lot of due diligence and paperwork to get the deal done right. For this reason, it’s always best to work with an M& lawyer for all such transactions.
Asset vs. Share Sale
There are two ways to sell a non-publicly traded company in Ontario:
- Asset Sale: Selling all or substantially all of the assets of a business (i.e. inventory, equipment, goodwill, trademarks, etc.); or
- Share Sale: Selling all the issued and outstanding shares of a business.
For example, if somebody is the sole owner of a laundromat business in a commercial plaza, that business owner likely leased out a commercial unit from the commercial plaza owner (the landlord) to store the equipment (i.e. carts, washers, dryers, etc.) and inventory (i.e. laundry detergent and dryer sheets for sale) of the business. After decades of owning the laundromat business, the business owner decides that now is a great time to sell! The business owner can choose to either: 1) sell all the assets such as the equipment, inventory, and goodwill in the name “Richmond Laundry” – this is an Asset Sale; or 2) sell all the shares he/she holds in the laundromat business – this is a Share Sale.
Why Would A Seller Want To Sell The Shares?
A seller would ideally want to sell the shares of their business. This way, the seller would pass on all the company’s assets and liabilities to the buyer (e.g., liabilities under client, supplier and employment agreements). On the other hand, a buyer would generally want to buy the assets of a business. This way, the buyer would only be responsible for the liabilities of the assets they buy, and not the liabilities of the entire business.
Another reason a seller may prefer a share sale is to take advantage of a Lifetime Capital Gains Exemption (LCGE) to avoid paying some or all of the capital gains from the sale of their shares (up to $892,218 in 2021). In order to qualify for that exemption, those shares will need to be qualified small business corporation (QSBC) shares. However, despite the tax advantages of share sales, the purchase price for a share sale is generally lower than the purchase price for an asset sale, due to the added risk for a buyer who will be incurring more liabilities.
Hummingbird Lawyers LLP Can Help
As mentioned above, M&A transactions are often complex and require a lot of due diligence and paperwork to get the deal done right. If you’re thinking about selling your business and want to know whether your shares are qualified small business corporation shares, our business Lawyers at Hummingbird Lawyers LLP are here to help advise you on each step of the process. Contact us today for more information and see how we can share our knowledge with you.
