Two Ways To Sell a Business

I was on the phone with a client tonight, trying to explain the difference between an asset sale and a share sale, and, now that I am a blawger, it occurred to me that this might make a good blawg article. It's been a long day, so I am not going to get into all of the pros and cons of these two very different transactions - we'll leave that for another article. I am just going to try to explain why they are different.

First, let's presume Mr. Green owns a lawncare company. Let's call it Green Lawncare Inc. (totally unimaginative, I know). Mr. Brown wants to purchase the business. The business likely has value to Mr. Brown because it has assets - maybe some equipment, a vehicle, some inventory and, usually an established name and customer list. Mr. Brown could start his own lawncare company, but there is value in purchasing an existing lawncare business, since he can get used equipment, presumably at a lower cost, and can assume all of the existing lawncare contracts that Mr. Green's business has. This means instant income as opposed to pounding the pavement for lawncare contracts.

Mr. Green can sell his business in one of two ways:

1. Asset Sale: Green Lawncare Inc. (a separate legally incorporated entity) can sell all or substantially all of its assets to Mr. Brown. Mr. Brown would pay the corporation for these assets. The agreement could stipulate which assets Mr. Brown would buy and which would stay in the company. For example, Mr. Brown may not wish to purchase the accounts receivable of the business. He could list the assets he did wish to purchase, such as the "goodwill" (customer lists, existing contracts, phone number) and the equipment necessary to carry on the business. Mr. Brown would not likely assume the liabilities of the business. On closing, Mr. Brown would pay the company for its assets. Mr. Brown would either buy those assets personally, or set up his own company (Brown Lawncare Inc?) to purchase the assets and operate the business through. Mr. Green could be paid by the Company (now flush with cash from the sale) through salary, management bonuses or dividends.

2. Share Sale: Mr. Green could sell all of his shares in Green Lawncare Inc. to Mr. Brown. Mr. Brown would then become the sole shareholder, director and officer of the company. Mr. Green would get the cash on closing, personally. Mr. Brown would continue to operate Green Lawncare Inc.

There are many issues involved with determining whether a transaction will be an asset sale or share sale and, often, the purchaser and vendor are at odds over which form the transaction should take. Considerations such as liability issues and taxation (as usual in the business law context!) should be addressed with both your lawyer and your accountant, before a final decision is made. Knowing the difference between the two types of transactions is the first step in making the right business decision.