PURCHASE PRICE VARIANCE: SHARE vs ASSET TRANSACTIONS
Pre-Acquisition - Letter of Intent - Due Diligence - Share Purchase / Sale - Asset Purchase / Sale - Merger - Equipment
Contact Neufeld Legal for business mergers and acquisitions at 403-400-4092 or Chris@NeufeldLegal.com
The total purchase price of a business acquisition is heavily influenced by its core legal structure, a share purchase (equity sale) or an asset purchase transaction. The primary driver of this variance is the allocation of risk, specifically the buyer's assumption of liabilities. In a share purchase transaction, the buyer acquires the target company as a legal entity, thereby inheriting all known, unknown, and contingent liabilities (including tax and litigation history) [more on share purchase risk]. Because the buyer assumes this significant risk, they typically demand a corresponding reduction in the purchase price to compensate for the higher exposure. Conversely, an asset purchase allows the buyer to "cherry-pick" desirable assets while explicitly excluding unwanted liabilities, resulting in a cleaner balance sheet and significantly lower liability risk. This reduced risk profile for the buyer means the negotiated price for the specific assets acquired often represents a higher immediate valuation, as less is discounted for potential future legal or financial burdens.
The second crucial difference impacting the purchase price stems directly from the tax consequences for both the buyer and the seller. In a share purchase, the seller (the shareholders) often benefits from favorable capital gains tax treatment, which can be significantly lower than the ordinary income tax rates applicable to asset sales. Because the seller's after-tax proceeds are maximized in a share deal, they may be willing to accept a slightly lower gross purchase price in exchange for this tax efficiency. For the buyer, however, a share deal is generally less tax-favorable because they inherit the target company’s historical, often lower, tax basis for its depreciable assets, limiting future tax deductions. This lack of a "step-up" in the asset basis is a genuine financial cost to the buyer, which they must quantify and factor into their valuation, further contributing to a lower overall share purchase price compared to an equivalent asset deal.
Conversely, asset purchase prices are often inflated to compensate the seller for their less favorable tax treatment. In an asset sale, the selling company (not the shareholder directly) is taxed on the sale proceeds, which can trigger depreciation recapture and various forms of ordinary income tax. Furthermore, when the remaining corporate proceeds are distributed to the shareholders, a second layer of tax (double taxation) is incurred. To offset this significant tax leakage, the seller must negotiate a higher gross purchase price in the asset deal structure simply to realize the same net proceeds they might have achieved in a more tax-efficient share deal. This forces the buyer in an asset purchase to pay more up front, despite benefiting from the ability to "step up" the tax basis of the assets they acquire, allowing them to claim greater future depreciation and amortization deductions.
Finally, the complexity of the deal structure and its impact on the valuation process contributes to the price disparity. An asset purchase requires a detailed Purchase Price Allocation, where the total value is meticulously assigned to each individual asset class (e.g., inventory, equipment, goodwill). The Purchase Price Allocation itself becomes a significant negotiation point, as the buyer seeks to allocate more value to depreciable assets (for tax benefits) and the seller aims to allocate more to capital assets (for tax mitigation), directly influencing the final price and terms. In contrast, a share purchase price is often determined based on enterprise value (a multiple of EBITDA or revenue), reflecting the value of the entire entity and its ongoing cash flows. While the underlying economics are similar, the necessary discounts for inherited liabilities in the share deal, versus the tax-offset premium required by the seller in the asset deal, solidify the structural difference in the final agreed-upon price.
When it comes to the legal component of corporate mergers & acquisitions, that is when our law firm comes into play. Such that when your business is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, we are capable of providing such strategic legal advice and direction. Contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 to schedule a confidential initial consultation for advancing your business' transactional objectives.