If selling your small business is your succession plan, you will need to determine the best sales option for this important transaction. Whether you plan to sell your business to a partner, an internal management group, or an outside third party, there are two types of business sales from which to choose: asset sales and share sales.
In an asset sale, you are selling the different assets that the business owns. Assets may be:
- Tangible: Land, buildings, equipment, cash, investments, and inventory
- Intangible: The goodwill your business has built up during its years of operation, customer lists, patents, copyrights, and trademarks
If your business is not incorporated, for example, a sole proprietorship or partnership, an asset sale is the only selling option, as there are no share certificates of ownership to transfer in a sale. To determine a selling price for the business, the different assets of the business are individually appraised.
The following table is an example of how a business's assets could be priced and set in an asset sale:
This example shows that listing your assets and their value and totaling them to arrive at a selling price for your business is not as simple as it seems. For example, if you decide that your business's goodwill is worth $20,000, you will need to prove its value to a potential buyer, who may prefer to attribute this value to a tangible asset to negotiate a lower price. To avoid these complications, it is important to seek professional assistance to help assess and sell your business.
Sole Proprietorship Asset Sales
From an asset perspective, sole proprietorship business sales can be particularly difficult:
- Because 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 that is very difficult to value. As an example, a financial consultant wishing to sell their 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 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 are completely cleared of the business.
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.
Asset Sale vs. Share Sale
When comparing asset sales to share sales, it's important to consider the pros and cons of each option:
- 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 items 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.
Both types of business sales will have tax implications. You should seek the advice of an accounting or legal professional to determine the best type of business sale for your situation.