WHY SELLERS OFTEN PREFER SHARE TRANSACTIONS

When selling a small business, one of the most critical decisions facing business owners is choosing the transaction structure. Should you sell the shares of your corporation or sell the underlying assets?

While buyers often prefer asset purchases for their flexibility and risk mitigation benefits, sellers frequently find share sales more advantageous from both financial and practical perspectives. Understanding these differences can significantly impact your net proceeds and overall transaction experience.

ADVANTAGES OF SHARE SALES FOR BUSINESS SELLERS

Tax Benefits: 

• Capital gains treatment - Share sales typically qualify for capital gains tax rates (50% inclusion rate in Canada), significantly lower than ordinary income tax rates

• Lifetime Capital Gains Exemption - Canadian sellers may access up to $1 million in tax-free gains on qualified small business corporation shares

• Immediate tax recognition - Sellers can control timing of tax implications more effectively

• Estate planning advantages - Better integration with succession and estate planning strategies

Higher Sale Values: 

• Premium pricing - Buyers often pay 10-20% more for share transactions due to acquired goodwill and established corporate structure

• Retained corporate assets - Cash, investments, and excess assets remain with the business, increasing total consideration

• Going concern value - Maintains business continuity, contracts, and relationships that command higher multiples

• Accumulated tax benefits - Corporate tax pools and credits transfer to buyer, justifying higher purchase prices

Transaction Efficiency: 

• Simpler documentation - Share purchase agreements typically less complex than asset purchase agreements

• Faster closing timelines - Fewer regulatory approvals and third-party consents required

• Preserved business relationships - Customer contracts, supplier agreements, and licenses automatically transfer

• Employee continuity - Employment relationships remain intact without re-hiring or benefit interruptions

Reduced Complexity:

• Minimal business disruption - Operations continue seamlessly during and after transaction

• Contract preservation - Valuable contracts and permits stay with the corporation

• Banking relationships maintained - Existing credit facilities and banking arrangements continue  

• Regulatory compliance simplified - Business licenses and regulatory approvals remain valid

DISADVANTAGES OF SHARE SALES FOR BUSINESS SELLERS

Ongoing Liability Exposure:

• Contingent liabilities - Sellers may remain responsible for unknown or undisclosed corporate liabilities

• Personal guarantees - May need to maintain personal guarantees until buyer obtains replacement financing • Warranty periods - Extended representation and warranty periods (typically 12-24 months)

• Indemnification obligations - Potential future claims against sellers for pre-closing issues

Due Diligence Intensity: 

• Comprehensive corporate review - Buyers conduct more thorough examination of all corporate records and history

• Extended timeline - More detailed review process can delay closing

• Higher legal costs - Complex corporate legal structures require specialized legal expertise •

Documentation burden - Extensive corporate minute books and compliance records must be current

Buyer Limitations: 

• Reduced buyer pool - Some buyers prefer asset purchases for risk management reasons

• Financing challenges - Lenders may prefer asset-secured transactions

• Integration difficulties - Harder for strategic buyers to integrate acquired shares into existing operations

WHICH STRUCTURE ACHIEVES HIGHER VALUES?

Share sales typically command higher values for several key reasons:

Share transactions generally achieve 10-20% higher sale prices compared to asset sales. This premium reflects the "going concern" value, where buyers acquire an established business entity complete with its operating history, relationships, and intangible assets. The corporate structure itself has value - established credit ratings, supplier relationships, customer contracts, and regulatory approvals all transfer seamlessly.

Additionally, buyers often pay more because they're acquiring accumulated corporate benefits like tax pools, investment tax credits, and loss carryforwards. These items have real economic value that justifies higher purchase prices.

CONCLUSION

While share sales aren't suitable for every situation, they offer compelling advantages for most small business sellers. The combination of preferential tax treatment, higher sale values, and simplified transactions often makes share sales the optimal choice despite the additional liability considerations.

The key is working with experienced legal and tax advisors who can structure the transaction to maximize these benefits while minimizing ongoing risks through proper warranties, indemnification caps, and escrow arrangements.

For most profitable small business sales, the financial benefits of share transactions significantly outweigh the disadvantages, making them the preferred exit strategy for sellers seeking to maximize their lifetime's work.

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