- A share sale transfers the company with everything in it, including its liabilities.
- An asset sale transfers selected assets, leaving most liabilities behind.
- Sellers usually prefer share sales; buyers usually prefer asset sales. The reasons are tax and liability.
- Due diligence and the representations and warranties are what allocate the risk of the unknown.
The two structures
In a share sale, the buyer purchases the shares of the corporation. The corporation continues unchanged, keeping its contracts, employees, permits, assets and liabilities. Only its ownership changes.
In an asset sale, the corporation sells specified assets. The buyer takes what is listed and generally leaves behind what is not, including most liabilities. The seller retains the corporate shell and the proceeds.
Why the sides disagree
Sellers generally prefer a share sale. It is a clean exit, and an individual selling shares of a qualifying small business corporation may be able to use the lifetime capital gains exemption, which can shelter a substantial gain. That single factor often drives the negotiation.
Buyers generally prefer an asset sale. They avoid inheriting unknown liabilities, and they can often step up the cost base of depreciable assets, improving future deductions.
The result is that structure is a negotiation with real money on both sides, and the purchase price frequently reflects a compromise on it.
What transfers, and what does not
In a share sale the corporation keeps its contracts, which avoids the need to reassign them, subject to change of control clauses, which many contracts contain and which can require consent anyway.
In an asset sale, contracts must be assigned, and each may need the counterparty’s consent. Leases, key supply agreements, licences and permits are the usual friction points, and a deal can turn on whether a landlord will consent.
Employees are treated differently. In a share sale, employment continues uninterrupted. In an asset sale, employment with the seller generally ends and the buyer offers new employment, but employment standards legislation treats service as continuous for statutory purposes where the business is sold, so accrued entitlements do not simply disappear.
Due diligence
The buyer’s investigation before closing. Its scope depends on structure: a share purchase demands far more, because the buyer is acquiring the company’s history along with its business.
Areas usually covered: corporate records and share capital; financial statements and tax filings; material contracts and change of control provisions; employment matters, including any misclassified contractors; litigation, threatened and actual; intellectual property ownership; real property and leases; regulatory compliance and permits; and environmental matters.
Two problems recur in owner-managed businesses: incomplete minute books, which make it impossible to confirm who owns the shares, and intellectual property developed by contractors without a written assignment, meaning the company does not own what it thinks it owns.
Representations, warranties and indemnities
These allocate the risk of what due diligence did not find.
Representations and warranties are statements about the business; if untrue, the buyer has a claim. The negotiation is over their breadth, the qualifications on them, and the survival period.
Indemnities cover identified risks specifically, often with their own caps and time limits. A known issue found in diligence is typically handled by a specific indemnity, a price adjustment, or a condition that it be resolved before closing.
A holdback or escrow is common, retaining part of the price for a period as security against claims.
The rest of the deal
Non-competition and non-solicitation covenants from the seller are standard and, given in connection with the sale of a business, are generally enforceable on broader terms than would be permitted in employment.
Where part of the price depends on future performance, the earn-out provisions need care: how performance is measured, who controls the business during the period, and what happens if the buyer changes how it operates.
Transition arrangements, the seller staying on for a period, should be documented as a separate engagement with defined scope and duration.
Common questions
Which structure is better?
Neither in the abstract. It depends on the tax position of the parties, the liability profile of the business, and how transferable the key contracts are.
Can a buyer be liable for the seller’s employees in an asset sale?
Employment standards legislation treats service as continuous where a business is sold, so accrued statutory entitlements generally follow the business.
How long does a sale take?
For a small owner-managed business, commonly a few months from letter of intent to closing, driven mainly by diligence and third-party consents.
Do I need a valuation?
Not legally, but a supportable valuation strengthens a negotiating position and is often required where tax planning or financing is involved.
Contacting us does not create a solicitor-client relationship. Please do not send confidential information until we have confirmed we can act for you. We aim to reply within 2 business days. Sending this form does not meet any court deadline or limitation period.
If you or a child are in immediate danger, call 911. This form is not an emergency service and is read during business hours. Assaulted Women’s Helpline 1-866-863-0511, Talk4Healing 1-855-554-4325, both open around the clock.
