When a business changes hands, the deal is usually structured in one of two ways: an asset purchase or a share purchase. The choice is not merely technical — it affects which liabilities transfer, the tax consequences for each side, and the complexity of the deal. Buyers and sellers often start with different preferences, and the final structure is part of the negotiation.
Asset purchase
In an asset deal, the buyer purchases specific assets of the business — equipment, inventory, contracts, goodwill, intellectual property — and typically chooses which liabilities, if any, to assume. This lets a buyer leave unwanted liabilities behind with the seller's company, which is why buyers often prefer asset deals. The trade-offs include having to transfer or re-assign individual assets and contracts (some of which may need third-party consents) and potentially different tax treatment.
Share purchase
In a share deal, the buyer purchases the shares of the company itself. The company continues to own everything it owned before — assets and liabilities alike — so the business carries on largely uninterrupted, and contracts usually stay in place without needing to be reassigned. Sellers often prefer share sales because they can offer tax advantages, such as access to the lifetime capital gains exemption for qualifying shares. The downside for the buyer is inheriting the company's history, including liabilities that may not be obvious.
Managing risk through the agreement
Whichever structure is used, the purchase agreement is where risk gets allocated. Key mechanisms include:
- Due diligence: the buyer investigates the business — financials, contracts, employees, litigation, tax, and compliance — before closing.
- Representations and warranties: statements about the business that, if untrue, give the buyer a remedy.
- Indemnities: promises to compensate for specified losses, often with limits and time periods.
- Conditions and closing deliverables: what must be true or delivered for the deal to close.
Why the structure choice matters
Because asset and share deals differ so much in their tax and liability consequences, the structure can significantly change the after-tax value of the deal and each side's risk. This is an area where advice — legal and tax — early in the process can materially affect the outcome.
Note: Tax and liability consequences vary and depend on the specifics — get advice. General information only, not legal advice.
This article is general information for educational purposes only and is not legal advice. For advice on your situation, book a consultation.