Is selling the business your succession plan? It is for many small business owners. Whether you sell plan to sell your business to a partner, internal management group, or an outside third party, there are actually only two types of business sales, an asset sale and a share sale.
This article explains each type of sale and compares the two types.
The Asset Sale
In an asset sale, you are selling the different assets that the business owns.
Assets may be:
- tangible, such as land, buildings, equipment, cash, investments, and inventory,
- intangible, such as the goodwill your business has built up during the years of its operation, customer lists, patents, copyrights, and trademarks.
If your business is not incorporated (i.e. a sole proprietorship or partnership), an asset sale is the only selling option since there are no share certificates of ownership to transfer in a sale.
To come up with a selling price for the business, the different assets of the business are individually appraised. (See 3 Methods of Business Valuation for more on this method of calculating the selling price for your business as well as other approaches.)
Here’s a simple example of how a sale price could be set for an asset sale. Let’s suppose that you want to sell your dog treat business. The list of your assets might look like this:
Looking at the example, you can easily see how quickly something that sounds so simple (list all your assets and what they’re worth and total them up to arrive at a selling price for your business) can become very complicated.
How do you know, for instance, that your business’s goodwill is worth $20,000?
And even if you think so, how will you prove that it is to a potential buyer who sees such a value on an intangible asset a good chance to knock down your selling price?
This is one of the reasons that it’s wise to seek professional assistance to help you assess and sell your business.
Sole Proprietorship Asset Sales
From an asset perspective sole proprietorship business sales can be particularly difficult:
- Since there is no distinction between personal and business assets in a sole proprietorship, problems may arise when it comes to transferring tangible assets. For example, if the business has been operated from home or from a building on the owner’s property, relinquishing the asset in a sale of the business is problematic. Similarly, the owner may wish to retain other assets such as vehicles or equipment for personal use.
- By definition a sole proprietorship is typically a one-person business and as such the owner’s skills and experience often constitute most or all of the value of the business. In this case it can become an almost purely intangible asset sale which is very difficult to value. As an example, a financial consultant wishing to sell his or her business may place a high value on having an extensive client list, but clients may not value the skills and experience of a new owner as highly and decide to take their business elsewhere.
The Share Sale (Incorporated Businesses Only)
The other type of business sale, the share sale (also known as a stock sale), simplifies matters because you are selling the shares of the business, rather than its assets.
This can be an advantage because all of the business’s liabilities are included in the sale so as a seller, you can get completely clear of the business.
And a share sale can be extremely beneficial tax-wise as you may be able to pay no tax on the sale if you are a Canadian resident and can use your $750,000 lifetime capital gains exemption to cover the sale.
The obvious catch to the share sale, however, is that your business has to be incorporated to be sold this way. So if you currently have a sole proprietorship or partnership that you want to sell, you may wish to restructure the business as a corporation first.
(Forms of Business Ownership in Canada provides details about the sole proprietorship, partnership and corporate business structures.)
Asset Sale vs. Share Sale
In summary then:
- An asset sale can be used to sell any type of business; a share sale can only be used to sell an incorporated business.
- In an asset sale, you can choose what you’re selling to a degree. For instance, you may want to keep the name of the business, or another particular asset. In a share sale, the entire business passes to the new owners, including things such as the business name.
- In a share sale, the liabilities are sold along with the rest of the business; in an asset sale, only assets are sold, meaning that the original owner may still be responsible for the business’s liabilities.
- Tax-wise, in a share sale, there is a possibility that the entire price you are paid for your business may be tax free if you are able to write it off using your lifetime capital gains exemption. In an asset sale, this is not the case because business assets will be affected by the rules of Capital Cost Allowance.
Seek Advice Before You Sell Your Business
Both types of business sales will have tax implications; you should seek the advice of accounting and/or legal professionals to determine the best type of business sale for your situation.
Continue at: https://www.thebalance.com/how-to-sell-a-business-asset-sale-vs-share-sale-2948477
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