On selling my business, should I sell shares or assets?
Q. On selling my business, should I sell shares or assets?
A: The sale of shares or assets will result in a difference in your after-tax cash flow.
With the sale of shares, cash is in your pocket. If the shares are QSBC (qualified small business corporation) shares, you may claim your $750K capital gains exemption. The company may not be a QSBC if there is excess cash or passive assets. If you take a promissory note, you may defer a portion of the taxable capital gain over 5 years.
With the sale of corporate assets, corporate tax is payable first then there is tax to you on the withdrawal of the after- tax proceeds. You may defer the personal tax if you retain the funds in the company. On the sale of goodwill, there is no reserve mechanism available to the corporation to defer the tax. Depending on your company’s profile, up to 50% of the goodwill may be withdrawn tax-free by making a capital dividend account election.
The purchaser generally likes to buy assets to bump the basis for depreciation or amortization. With this in mind, there is generally arbitration among the buyer and seller to account for the tax differences and the time value of money on getting the funds into the vendor’s hands. In some cases, the purchaser may buy shares and subsequently implement a reorganization that will bump-up the tax cost of underlying assets.
You should consult with your professional advisor on all related matters.