What is the Difference Between a Share Purchase and an Asset Purchase?

The structure of your transaction determines how much of the purchase price you actually keep. A share purchase and an asset purchase are not interchangeable options; they are fundamentally different transactions with different tax consequences, different risk profiles, and different implications for both the buyer and the seller. Getting the structure right from the start is one of the most important decisions in any M&A transaction.

What is a Share Purchase?

In a share purchase, the buyer acquires the shares of the corporation. The company itself does not change hands; ownership of the company does. Everything inside the corporation (its assets, its contracts, its employees, its liabilities, and its history) stays exactly where it is. The buyer steps into the shoes of the selling shareholder.

For a seller, this is almost always the preferred structure. A share sale gives the selling shareholder direct access to the capital gain on the shares, which may be sheltered in whole or in part by the Lifetime Capital Gains Exemption (LCGE). The after-tax proceeds from a share sale are typically significantly higher than from an equivalent asset sale.

For a buyer, a share purchase means acquiring everything that comes with the company, including liabilities that may not be fully visible during due diligence. Buyers require robust representations and warranties from the seller precisely because of this; they are buying the unknown liabilities, without any prior history or knowledge. This is often why share sales require much more negotiation over the final language in the purchase and sale agreement.

What is an Asset Purchase?

In an asset purchase, the buyer selects specific assets and liabilities to acquire. The corporation itself is not sold; the buyer picks what it wants (equipment, contracts, customer lists, intellectual property, goodwill) and leaves behind what it does not want (legacy liabilities, litigation exposure, unfavourable contracts).

For a buyer, this is typically the preferred structure. It provides a clean acquisition of only the assets the buyer wants, with the ability to step up the cost base of depreciable assets for tax purposes. The buyer is not inheriting all the unknown liabilities in the corporation. There are potential tax advantages to the buyer, including the ability to bump up the cost base of assets that the seller had already depreciated, thereby allowing them to be depreciated a second time.

For a seller, an asset sale is generally less tax efficient. The proceeds flow into the corporation rather than directly to the shareholder, which means a second layer of tax before the money reaches the seller's pocket (on the portion that does not get added to the capital dividend account). There are a lot of tax reasons why sellers don’t like asset sales, including that all of the proceeds won’t necessarily be categorized as capital gains, the LCGE is not available on an asset sale, and there could be tax payable on the sale of assets that have been depreciated beyond their sale price (i.e. recapture).

How Do the Parties Resolve the Conflict?

The buyer wants an asset deal and the seller wants a share deal. This tension is present in almost every lower mid-market transaction, and it is resolved through negotiation, typically with one of two outcomes.

The first is that the parties agree on a share purchase with enhanced representations and warranties from the seller, giving the buyer contractual protection against the hidden liabilities it is assuming. This is the most common outcome in the Alberta lower mid-market.

The second is a price adjustment. If the buyer insists on an asset purchase, the seller will typically demand a higher purchase price to compensate for the additional tax cost. The quantum of that adjustment is a tax calculation, not a guess; your M&A lawyer and accountant should be running those numbers at the LOI stage, not after the definitive agreement is drafted.

Why Structure Matters More Than Price

We are often approached by sellers that say they are selling their business for $5M, not knowing whether the buyer intends to buy the shares or the assets. A seller who focuses exclusively on the headline purchase price and ignores structure is making a significant mistake. A $5M share purchase and a $5M asset purchase are not the same transaction. The after-tax proceeds to the seller can differ by hundreds of thousands of dollars (or millions) depending on the structure, the seller's personal tax situation, and whether LCGE planning has been done properly in advance.

This is why the structure conversation needs to happen before the letter of intent is negotiated, not at the definitive agreement stage. By the time the purchase agreement is being drafted, the commercial terms are largely set. Trying to renegotiate structure late in the process is expensive, disruptive, and in some cases fatal to the deal.

Outsiders Law advises Alberta buyers and sellers on transaction structure from the first conversation. If you are thinking about buying or selling a business, the best time to talk to us is now.

For more on the M&A process, visit our Mergers & Acquisitions page or our Selling Your Business in Alberta page. 

Disclaimer

This article is for general informational purposes only and does not constitute legal advice. It does not create a solicitor-client relationship and should not be relied upon as a substitute for advice tailored to your specific transaction or circumstances.

If you’re navigating the complexities of M&A, remember that the details matter. For expert guidance, feel free to contact Outsiders Law.